Daily changes in fed funds futures prices
By: James D. Hamilton.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13112.; Working paper series (National Bureau of Economic Research) -- working paper no. 13112.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 28
Subjects: Federal funds market (United States) -- Prices -- Mathematical models
Description: This paper explores the properties of daily changes in the prices for near-term fed funds futures contracts. The paper finds these contracts to be excellent predictors of the fed funds rate, and shows that the claim of a nonzero term premium in the short-horizon contracts is more sensitive to outliers than previous research appears to have recognized. I find some statistically significant evidence of serial correlation in the daily changes, but this accounts for only a tiny part of the one-day movements and there is essentially zero predictability for horizons longer than one day. Settlement futures prices for each day appear to incorporate the information embodied in that day's term structure of longer-horizon Treasury securities. Previous employment growth makes a statistically significant contribution to predicting futures price changes, though again this could only account for a tiny part of the daily variance. The paper concludes that futures prices provide a very useful measure of the daily changes in the market's expectation of near-term changes in Fed policy.
Notes: "May 2007"

Includes bibliographical references (p. 19-20).

Also available in PDF from the NBER world wide web site (www.nber.org).