The Information Content of Forward and Futures Prices: Market Expectations and the Price of Risk

27 Pages Posted: 2 Jul 2004  

Sergey Chernenko

Purdue University - Department of Management

Krista Schwarz

University of Pennsylvania - Finance Department

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: June 2004

Abstract

Forward and futures rates are frequently used as measures of market expectations. In this paper we apply standard forecast efficiency tests, and some newer exact sign and rank tests, to a wide range of forward and futures rates, and in this way test whether these are in fact rational expectations of future actual prices. The forward and futures rates that we study under a common methodology include foreign exchange forward rates, U.S. and foreign interest rate futures and forward rates, oil futures and natural gas futures. For most, but not all, of these instruments, we find that we can reject the hypothesis that the forward or futures rates are rational expectations of actual future prices. It is well known that foreign exchange forward rates give less accurate forecasts than a random walk, but we show that this is also true for some interest rate futures and forward rates. We conclude that forward and futures prices are not generally pure measures of market expectations: they are also heavily affected by the market price of risk.

Keywords: forward contracts, futures, forecast evaluation, risk premia, random walk

JEL Classification: C22, E17, G12

Suggested Citation

Chernenko, Sergey and Schwarz, Krista and Wright, Jonathan H., The Information Content of Forward and Futures Prices: Market Expectations and the Price of Risk (June 2004). FRB International Finance Discussion Paper No. 808. Available at SSRN: https://ssrn.com/abstract=560386 or http://dx.doi.org/10.2139/ssrn.560386

Sergey Chernenko

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

Krista Schwarz

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Jonathan H. Wright (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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