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The information content of forward and futures prices: market expectations and the price of risk

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Author Info
Sergey V. Chernenko
Abstract

Forward and futures rates are frequently used as measures of market expectations. In this paper we apply standard forecast efficiency tests, and some newer exact sign and rank tests, to a wide range of forward and futures rates, and in this way test whether these are in fact rational expectations of future actual prices. The forward and futures rates that we study under a common methodology include foreign exchange forward rates, U.S. and foreign interest rate futures and forward rates, oil futures and natural gas futures. For most, but not all, of these instruments, we find that we can reject the hypothesis that the forward or futures rates are rational expectations of actual future prices. It is well known that foreign exchange forward rates give less accurate forecasts than a random walk, but we show that this is also true for some interest rate futures and forward rates. We conclude that forward and futures prices are not generally pure measures of market expectations: they are also heavily affected by the market price of risk.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 808.

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Date of creation: 2004
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Handle: RePEc:fip:fedgif:808

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Keywords: Interest rate futures ; Markets;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Phillips, Kerk L. & Snow, Karl, 1998. "The forward bias: is it a money tree?," Economics Letters, Elsevier, vol. 61(3), pages 373-379, December. [Downloadable!] (restricted)
  2. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  4. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September. [Downloadable!] (restricted)
  6. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April. [Downloadable!] (restricted)
  7. Dominique Dupont & Brian Sack, 1999. "The Treasury securities market: overview and recent development," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 785-806. [Downloadable!]
  8. Campbell, Bryan & Dufour, Jean-Marie, 1995. "Exact Nonparametric Orthogonality and Random Walk Tests," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 1-16, February. [Downloadable!] (restricted)
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  9. Monika Piazzesi & Eric Swanson, 2004. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy," NBER Working Papers 10547, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Campbell, Bryan & Ghysels, Eric, 1995. "Federal Budget Projections: A Nonparametric Assessment of Bias and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 17-31, February. [Downloadable!] (restricted)
  11. Timmermann, Allan G, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1135-45, November. [Downloadable!] (restricted)
  12. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November. [Downloadable!] (restricted)
  13. Roberto Perli & Brian Sack, 2003. "Does mortgage hedging amplify movements in long-term interest rates?," Finance and Economics Discussion Series 2003-49, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Alex Maynard & Peter C. B. Phillips, 2001. "Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 671-708. [Downloadable!]
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  1. Patrizio Pagano & Massimiliano Pisani, 2009. "Risk-adjusted forecasts of oil prices," Working Paper Series 999, European Central Bank. [Downloadable!]
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  2. Giliola Frey & Matteo Manera & Anil Markandya & Elisa Scarpa, 2009. "Econometric Models for Oil Price Forecasting: A Critical Survey," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 10(1), pages 29-44, 04. [Downloadable!]
  3. Elif C. Arbatli, 2008. "Futures Markets, Oil Prices and the Intertemporal Approach to the Current Account," Working Papers 08-48, Bank of Canada. [Downloadable!]
  4. Rasmus Fatum & Barry Scholnick, . "Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?," EPRU Working Paper Series 05-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Nov 2005. [Downloadable!]
  5. Andrea Monticini & Giacomo Vaciago, 2007. "Are Euro Interest Rates led by FED Announcements?," Money Macro and Finance (MMF) Research Group Conference 2006 16, Money Macro and Finance Research Group. [Downloadable!]
  6. Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS. [Downloadable!]
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