The Information Content of Interest Rate Futures and Time-Varying Risk Premia.
Posted: 30 Mar 2005
The objective of the present study is to examine the price discovery hypothesis in the short sterling futures market. The analytical framework employed, to examine the interaction between spot and futures rates, is based on a VAR cointegration model. The current research takes into account the necessary conditions, when testing the unbiasedness of the futures market, as well as the issues of risk neutrality and the rational use of all available and relevant information. The paper finds that the price discovery hypothesis holds for up to seven weeks prior to maturity of the futures contract. Furthermore, an examination of the sample period over which efficiency does not hold, provides evidence for the presence of time-varying risk premia. The findings also suggest that the premium and the expected spot change volatility are statistically significant, with the former being slightly lower than the latter.
Keywords: Price discovery hypothesis, Speculative efficiency, Short sterling, VAR cointegration, Time-varying risk premia
JEL Classification: C3, C32, G1, G14
Suggested Citation: Suggested Citation