The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures

Posted: 4 May 2000

See all articles by Narasimhan Jegadeesh

Narasimhan Jegadeesh

Emory University - Department of Finance

George Pennacchi

University of Illinois

Abstract

This paper considers an equilibrium model of the term structure that is determined by two stochastic factors: a short term interest rate and a target level to which the short rate is expected to revert. A Kalman filter technique that uses a time series, cross-section of Eurodollar futures prices is developed to estimate the parameters of the model. The term structures of spot LIBOR and Eurodollar futures volatility are compared to that predicted by the model. The empirical results indicate that the two factor specification represents a significant improvement over its one factor version.

JEL Classification: G13, G12, E43

Suggested Citation

Jegadeesh, Narasimhan and Pennacchi, George G., The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures. J. OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 3, August 1996. Available at SSRN: https://ssrn.com/abstract=7334

Narasimhan Jegadeesh (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

George G. Pennacchi

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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