What do Swiss franc Libor futures really tell us?
Basil Guggenheim and
No 2018-06, Working Papers from Swiss National Bank
This paper sheds light on Swiss franc Libor futures, which are often used to measure interest rate expectations. We show that the diï¬€erences between Libor futures and realized rates (excess returns) are, on average, positive over the last 25 years. Using interest rate surveys, we decompose excess returns into a (forward) term premium and forecast errors. The decomposition reveals that the bulk of excess returns arises from forecast errors, while the term premium is time varying but on average zero. We ï¬ nd that the term premium positively correlates with the business cycle, interest rate developments, and in absolute values increases with interest rate uncertainty. Our ï¬ ndings suggest that Libor futures should be adjusted by the term premium to extract risk-neutral interest rate expectations.
Keywords: Term premium; Libor futures; Swiss franc (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2018-06
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