Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153413
Authors: 
Ferrero, Giuseppe
Nobili, Andrea
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 979
Abstract: 
The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns - the difference between futures rates and the realized rates - are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are negatively correlated with the business cycle only in the United States.
Subjects: 
business cycle
excess returns
futures contracts
monetary policy expectations
JEL: 
E43
E44
E52
Document Type: 
Working Paper

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