New No-Arbitrage Conditions and the Term Structure of Interest Rate Futures

Annals of Finance, 2006

21 Pages Posted: 17 May 2006

See all articles by Kristian R. Miltersen

Kristian R. Miltersen

Copenhagen Business School

J. Aase Nielsen

Aarhus University - Department of Theoretical Statistics and Operations Research

Klaus Sandmann

University of Bonn - The Bonn Graduate School of Economics

Abstract

Interest rate futures are basic securities and at the same time highly liquid traded objects. Despite this observation, most models of the term structure of interest rate assume forward rates as primary elements. The processes of futures prices are therefore endogenously determined in these models. In addition, in these models hedging strategies are based on forward and/or spot contracts and only to a limited extent on futures contracts.

Inspired by the market model approach of forward rates by Miltersen, Sandmann, and Sondermann (1997), the starting point of this paper is a model of futures prices. Using, as the input to the model, the prices of futures on interest related assets new no-arbitrage restrictions on the volatility structure are derived. Moreover, these restrictions turn out to prevent an application of a market model based on futures prices.

Keywords: No-arbitrage restrictions, term structure of interest rates, interest rate futures, change of measure

JEL Classification: G13

Suggested Citation

Miltersen, Kristian Risgaard and Nielsen, Jørgen Aase and Sandmann, Klaus, New No-Arbitrage Conditions and the Term Structure of Interest Rate Futures. Annals of Finance, 2006, Available at SSRN: https://ssrn.com/abstract=901953

Kristian Risgaard Miltersen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Jørgen Aase Nielsen

Aarhus University - Department of Theoretical Statistics and Operations Research ( email )

DK-8000 Aarhus C
Denmark

Klaus Sandmann (Contact Author)

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

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