Short-term interest rate futures as monetary policy forecasts

Giuseppe Ferrero and Andrea Nobili

No 681, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are correlated with the business cycle (negatively) only in the United States.

Keywords: futures rates; monetary policy; risk-premium (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 0681/en_tema_681.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_681_08

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().