Futures Prices as Risk-adjusted Forecasts of Monetary Policy

Monika Piazzesi and Eric Swanson

No 10547, NBER Working Papers from National Bureau of Economic Research, Inc

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 to account for these premia. 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 has important consequences for the expected future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy surprises used in the literature.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-mac
Note: ME
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Published as Piazzesi, Monika, and Swanson, Eric T. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy." Journal of Monetary Economics 55(4): 677-691, May 2008
Published as Monika Piazzesi & Eric Swanson, 2004. "Future prices as risk-adjusted forecasts of monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.

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Journal Article: Futures prices as risk-adjusted forecasts of monetary policy (2008)
Working Paper: Futures prices as risk-adjusted forecasts of monetary policy (2006)
Journal Article: Future prices as risk-adjusted forecasts of monetary policy (2004)
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