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Working Paper 2003-040D

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"Year-End Seasonality in One-Month LIBOR Derivatives"
by Christopher J. Neely, and Drew B. Winters

We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase appears in forward rates and derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the derivative contract, these derivative contracts provide biased forecasts of both future interest rates and their volatility. The bias appears to be different at year's end for the LIBOR futures contract, but not for the options contract. The information in the derivatives almost always subsumes simple benchmark forecasts.

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Category > Applied Econometrics
Category > Banking
Category > Finance
Category > Monetary Policy/Macroeconomics
Author > Christopher J. Neely