Seasonality in One-Month Libor Derivatives

FRB of St. Louis Working Paper No. 2003-040B

37 Pages Posted: 13 Jan 2005

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Drew B. Winters

Texas Tech University

Date Written: September 20, 2004

Abstract

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

Neely, Christopher J. and Winters, Drew B., Seasonality in One-Month Libor Derivatives (September 20, 2004). FRB of St. Louis Working Paper No. 2003-040B, Available at SSRN: https://ssrn.com/abstract=648223 or http://dx.doi.org/10.2139/ssrn.648223

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

Drew B. Winters

Texas Tech University ( email )

Finance Department
Rawls College of Business
Lubbock, TX 79409
United States
806-742-3350 (Phone)
806-742-3197 (Fax)

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