A Note on the Bias of using Futures Rates as a Proxy for the Instantaneous Forward Rate

Thuy-Duong To
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Thuy-Duong To: School of Banking and Finance, University of NSW

No 149, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The note shows that there is a non-negligible bias in using the futures rates as a proxy for the instantaneous forward rates in the estimation of forward rate models. It is therefore desirable to derive the evolution of observable rates, then use the distributional properties of this evolution to do the estimation. In a general case where these properties are hard to obtained, a filtering technique is required.

Keywords: Heath-Jarrow-Morton; forward rate; futures; estimation bias (search for similar items in EconPapers)
JEL-codes: C51 E43 G12 G13 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2004-12-01
New Economics Papers: this item is included in nep-fmk and nep-mac
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