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Estimates of the term premium on near-dated federal funds futures contracts

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  • J. Benson Durham

Abstract

This paper examines estimates of the term premium on federal funds futures rates, with a focus on near-dated contracts and therefore the more immediate policy horizon. The first set of methods assumes that the term premium is constant over time. Under this framework, calculations that use survey data to proxy for forecast errors produce more intuitive results than estimates based on the restrictive assumption that forecast errors average to zero over the sample. The second set of methods allows the term premium to vary over time, but the results based on the term structure of near-dated federal funds futures contracts are highly volatile, which perhaps reflects numerous technical factors in the underlying federal funds market. Finally, under an asset-pricing approach, the CAPM suggests that the risk premium on federal funds futures is either less than or equal to zero, while APT indicates that it can be positive.

Suggested Citation

  • J. Benson Durham, 2003. "Estimates of the term premium on near-dated federal funds futures contracts," Finance and Economics Discussion Series 2003-19, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2003-19
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    References listed on IDEAS

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    Cited by:

    1. Giuseppe Ferrero & Andrea Nobili, 2008. "Short-term interest rate futures as monetary policy forecasts," Temi di discussione (Economic working papers) 681, Bank of Italy, Economic Research and International Relations Area.
    2. Coffinet, J., 2008. "La prévision des taux d’intérêt à partir de contrats futures : l’apport de variables économiques et financières," Working papers 193, Banque de France.
    3. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
    4. Brent Bundick, 2007. "Do federal funds futures need adjustment for excess returns? a state-dependent approach," Research Working Paper RWP 07-08, Federal Reserve Bank of Kansas City.
    5. Carlo Altavilla & Raffaella Giacomini & Riccardo Costantini, 2014. "Bond Returns and Market Expectations," Journal of Financial Econometrics, Oxford University Press, vol. 12(4), pages 708-729.
    6. Giuseppe Ferrero & Andrea Nobili, 2009. "Futures Contract Rates as Monetary Policy Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 109-145, June.
    7. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics.
    8. Hibiki Ichiue & Tomonori Yuyama, 2007. "Biases in Monetary Policy Expectations Extracted From Fed Funds Futures and Surveys," Bank of Japan Working Paper Series 07-E-15, Bank of Japan.
    9. Refet S. Gürkaynak, 2005. "Using federal funds futures contracts for monetary policy analysis," Finance and Economics Discussion Series 2005-29, Board of Governors of the Federal Reserve System (U.S.).

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    Keywords

    Federal funds rate;

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