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Futures prices as risk-adjusted forecasts of monetary policy

Monika Piazzesi () and Eric Swanson

No 2006-23, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy shocks used in the literature.

Keywords: Federal funds rate; Federal funds market (United States); Monetary policy (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Futures prices as risk-adjusted forecasts of monetary policy (2008) Downloads
Journal Article: Future prices as risk-adjusted forecasts of monetary policy (2004) Downloads
Working Paper: Futures Prices as Risk-adjusted Forecasts of Monetary Policy (2004) Downloads
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