What do Swiss franc Libor futures really tell us?

Lucas Fuhrer, Basil Guggenheim and Matthias Jüttner

No 2018-06, Working Papers from Swiss National Bank

Abstract: This paper sheds light on Swiss franc Libor futures, which are often used to measure interest rate expectations. We show that the differences 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 find that the term premium positively correlates with the business cycle, interest rate developments, and in absolute values increases with interest rate uncertainty. Our findings 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)
Pages: 24 pages
Date: 2018
New Economics Papers: this item is included in nep-eec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2018-06

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