Sources of Variation in Holding Returns for Fed Funds Futures Contracts
33 Pages Posted: 22 Mar 2015
Date Written: October 2009
This paper relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short-horizon contracts is mixed, we find that gains in longer-horizon contracts can be well described using Markov switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high.
Keywords: federal funds, futures, monetary policy, Markov switching
JEL Classification: E40, E50, G13
Suggested Citation: Suggested Citation