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Year-end seasonality in one-month LIBOR derivatives

  • Christopher J. Neely
  • Drew B. Winters

We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in one-month LIBOR. The cash market rate increase appears in forward rates and derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the derivative contract, these derivative contracts provide biased forecasts of both future interest rates and their volatility. The bias appears to be different at year's end for the LIBOR futures contract, but not for the options contract. The information in the derivatives almost always subsumes simple benchmark forecasts. ; Earlier title: Seasonality in one-month LIBOR derivatives

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File URL: http://research.stlouisfed.org/wp/2003/2003-040.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-040.

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Date of creation: 2005
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Publication status: Published in Journal of Derivatives, Spring 2006, 13(3), pp. 47-65
Handle: RePEc:fip:fedlwp:2003-040
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  1. Robert F. Engle & Joshua Rosenberg, 1998. "Testing the Volatility Term Structure using Option Hedging Criteria," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-031, New York University, Leonard N. Stern School of Business-.
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