Futures Prices as Risk-adjusted Forecasts of Monetary Policy / Monika Piazzesi, Eric Swanson.

Format:

Book

Author/Creator:

Piazzesi, Monika.

Contributor:

National Bureau of Economic Research.

Swanson, Eric.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10547.

NBER working paper series no. w10547

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment to account for these premia. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia has important consequences for the expected future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy surprises used in the literature.

Notes:

Print version record

June 2004.