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Daily Changes in Fed Funds Futures Prices

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  • James D. Hamilton

Abstract

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13112.

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Date of creation: May 2007
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Publication status: published as James D. Hamilton, 2009. "Daily Changes in Fed Funds Futures Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 567-582, 06.
Handle: RePEc:nbr:nberwo:13112

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  1. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  2. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  3. James D. Hamilton, 2008. "Daily Monetary Policy Shocks and the Delayed Response of New Home Sales," NBER Working Papers 14223, National Bureau of Economic Research, Inc.
  4. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series, Federal Reserve Bank of San Francisco 2006-23, Federal Reserve Bank of San Francisco.
  5. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  6. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  7. William Poole & Robert H. Rasche, 2000. "Perfecting the market's knowledge of monetary policy," Working Papers, Federal Reserve Bank of St. Louis 2000-010, Federal Reserve Bank of St. Louis.
  8. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers, Banca Italia - Servizio di Studi 269, Banca Italia - Servizio di Studi.
  9. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  10. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 523-544, June.
  11. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2006. "Market-based measures of monetary policy expectations," Working Paper Series, Federal Reserve Bank of San Francisco 2006-04, Federal Reserve Bank of San Francisco.
  12. John B. Carlson & Ben Craig & Patrick Higgins & William R. Melick, 2006. "FOMC communications and the predictability of near-term policy decisions," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Jun.
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Cited by:
  1. Rangel, José Gonzalo, 2011. "Macroeconomic news, announcements, and stock market jump intensity dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(5), pages 1263-1276, May.
  2. Tideman, T. Nicolaus & Plassmann, Florenz, 2010. "Pricing externalities," European Journal of Political Economy, Elsevier, Elsevier, vol. 26(2), pages 176-184, June.
  3. Joshua D. Angrist & Òscar Jordà & Guido Kuersteiner, 2013. "Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited," NBER Working Papers 19355, National Bureau of Economic Research, Inc.
  4. Jean-Sébastien Fontaine, 2012. "Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy," Working Papers, Bank of Canada 12-41, Bank of Canada.
  5. Mark Gertler & Peter Karadi, 2014. "Monetary Policy Surprises, Credit Costs and Economic Activity," NBER Working Papers 20224, National Bureau of Economic Research, Inc.
  6. Gustavo Abarca & José Gonzalo Rangel & Guillermo Benavides, 2010. "Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009," Working Papers, Banco de México 2010-17, Banco de México.
  7. Di Maggio, Marco, 2010. "The Political Economy of the Yield Curve," MPRA Paper 20697, University Library of Munich, Germany.
  8. Andrea Monticini & Francesco Ravazzolo, 2014. "Forecasting the intraday market price of money," DISCE - Working Papers del Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) def10, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  9. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2008. "Geography or skills: what explains Fed Wachters' forecast accuracy of US monetary policy?," Discussion Papers 2008/11, Free University Berlin, School of Business & Economics.
  10. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2011. "Geography, skills or both: What explains Fed watchers' forecast accuracy of US monetary policy?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(3), pages 420-437, September.
  11. Ghent, Andra, 2007. "Why do markets react badly to good news? Evidence from Fed Funds Futures," MPRA Paper 1708, University Library of Munich, Germany.
  12. Coffinet, J., 2008. "La prévision des taux d’intérêt à partir de contrats futures : l’apport de variables économiques et financières," Working papers, Banque de France 193, Banque de France.
  13. Carlo Altavilla & Raffaella Giacomini & Riccardo Costantini, 2013. "Bond returns and market expectations," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP20/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  14. Lahura, Erick, 2012. "Midiendo los efectos de la política monetaria a través de las expectativas de mercado," Revista Estudios Económicos, Banco Central de Reserva del Perú, Banco Central de Reserva del Perú, issue 23, pages 39-52.

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