Futures Contract Rates as Monetary Policy Forecasts

41 Pages Posted: 23 Dec 2008

Date Written: December 3, 2008

Abstract

The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are negatively correlated with the business cycle only in the United States.

Keywords: monetary policy expectations, excess returns, futures contracts, business cycle

JEL Classification: E43, E44, E52

Suggested Citation

Ferrero, Giuseppe and Nobili, Andrea, Futures Contract Rates as Monetary Policy Forecasts (December 3, 2008). ECB Working Paper No. 979, Available at SSRN: https://ssrn.com/abstract=1310616 or http://dx.doi.org/10.2139/ssrn.1310616

Giuseppe Ferrero (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Nobili

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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