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Futures Prices as Risk-adjusted Forecasts of Monetary Policy

  • Monika Piazzesi
  • Eric Swanson

Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment to account for these premia. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia has important consequences for the expected future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy surprises used in the literature.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10547.

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Date of creation: Jun 2004
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Publication status: published as Piazzesi, Monika, and Swanson, Eric T. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy." Journal of Monetary Economics 55(4): 677-691, May 2008
Handle: RePEc:nbr:nberwo:10547
Note: ME
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