Extracting the Expected Path of Monetary Policy From Futures Rates

Brian Sack

61 citations0/0 files storedJournal of Futures Markets

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

Abstract Federal funds and eurodollar futures contracts are among the most useful instruments for deriving expectations of the future path of monetary policy. However, reading policy expectations from those instruments is complicated by the presence of risk premia. This paper demonstrates how to extract the expected policy path under the assumption that risk premia are constant over time, and under a simple model that allows risk premia to vary. In the latter case, the risk premia are identified under the assumption that policy expectations level out after a long enough horizon. The results provide evidence that the risk premia on these futures contracts vary over time. The impact of this variation is fairly limited for futures contracts with short horizons, but it increases as the horizon of the contracts lengthens. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:733–754, 2004

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References

1991Common Factors Affecting Bond Returns 2003A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables 1979The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure 2002Term structure evidence on interest rate smoothing and monetary policy inertia 1996The Fed funds futures rate as a predictor of federal reserve policy 2003Anticipations of Monetary Policy in Financial Markets 1996The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures

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