Seasonality in One-Month Libor Derivatives
FRB of St. Louis Working Paper No. 2003-040B
37 Pages Posted: 13 Jan 2005
Date Written: September 20, 2004
We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase passes through to derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the derivative contract, these derivative contracts provide biased forecasts of both future interest rates and their volatility. The turn-of-the-year effect appears to contribute to the bias in the futures contract but not in the options contract. The information in the derivatives almost always subsumes simple benchmark forecasts.
Suggested Citation: Suggested Citation