The Term Structure of Interest-Rate Futures Prices

45 Pages Posted: 3 Nov 2008

See all articles by Richard C. Stapleton

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 2001

Abstract

We derive general properties of two-factor models of the term structure of interestrates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the term structure shifts and tilts as the factor rates vary. The cross-sectional propertiesof the model derive from the solution of a two-dimensional, autoregressive process for the short-term rate, which exhibits both mean-reversion and a lagged persistence parameter. We show that the correlation of the futures rates is restricted by the no-arbitrage conditions of the model. In addition, we investigate the determinants of the volatilities and the correlations ofthe futures rates of various maturities. These are shown to be related to the volatility of the short rate, the volatility of the second factor, the degree of mean-reversion and the persistence of the second factor shock. We also discuss the extension of our model to three or more factors. We obtain specific results for futures rates in the case where the logarithm of the short-term rate [e.g., the London Inter-Bank Offer Rate (LIBOR)] follows atwo-dimensional process. We calibrate the model using data from Eurocurrencyinterest rate futures contracts, using alternative optimization criteria. We then derive the term structures of volatilities and correlations implied by the model.

Suggested Citation

Stapleton, Richard C. and Subrahmanyam, Marti G., The Term Structure of Interest-Rate Futures Prices (September 2001). NYU Working Paper No. FIN-01-040, Available at SSRN: https://ssrn.com/abstract=1294586

Richard C. Stapleton (Contact Author)

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
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Glasgow G4 0LN
United Kingdom
+44 1524 381 172 (Phone)
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Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

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