The information content of forward and futures prices: market expectations and the price of risk

Sergey V. Chernenko

No 808, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Forward and futures rates are frequently used as measures of market expectations. In this paper we apply standard forecast efficiency tests, and some newer exact sign and rank tests, to a wide range of forward and futures rates, and in this way test whether these are in fact rational expectations of future actual prices. The forward and futures rates that we study under a common methodology include foreign exchange forward rates, U.S. and foreign interest rate futures and forward rates, oil futures and natural gas futures. For most, but not all, of these instruments, we find that we can reject the hypothesis that the forward or futures rates are rational expectations of actual future prices. It is well known that foreign exchange forward rates give less accurate forecasts than a random walk, but we show that this is also true for some interest rate futures and forward rates. We conclude that forward and futures prices are not generally pure measures of market expectations: they are also heavily affected by the market price of risk.

Keywords: Interest rate futures; Markets (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (21)

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