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Sources of Variation in Holding Returns for Fed Funds Futures Contracts

  • James D. Hamilton
  • Tatsuyoshi Okimoto

This paper relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short-horizon contracts is mixed, we find that gains in longer horizon contracts can be well described using Markov-switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15736.

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Date of creation: Feb 2010
Date of revision:
Publication status: published as “Sources of Variation in Holding Returns for Fed Funds Futur es Con- tracts,” Journal of Futures Markets 31, no. 3 (2011): 205-229 (coauthored with Tatsuyoshi Okimoto).
Handle: RePEc:nbr:nberwo:15736
Note: ME
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  1. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  2. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  3. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
  4. Giuseppe Ferrero & Andrea Nobili, 2009. "Futures Contract Rates as Monetary Policy Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 109-145, June.
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  7. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers 269, Banca Italia - Servizio di Studi.
  8. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  9. Andrew Ang & Geert Bekaert & Min Wei, 2007. "The Term Structure of Real Rates and Expected Inflation," NBER Working Papers 12930, National Bureau of Economic Research, Inc.
  10. 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.
  11. Brian Sack, 2004. "Extracting the Expected Path of Monetary Policy From Futures Rates," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(8), pages 733-754, 08.
  12. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  13. Qiang Dai & Kenneth J. Singleton & Wei Yang, 2007. "Regime Shifts in a Dynamic Term Structure Model of U.S. Treasury Bond Yields," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1669-1706, 2007 12.
  14. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  15. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 285-318, April.
  16. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
  17. Smith, Aaron & Naik, Prasad A. & Tsai, Chih-Ling, 2006. "Markov-switching model selection using Kullback-Leibler divergence," Journal of Econometrics, Elsevier, vol. 134(2), pages 553-577, October.
  18. Brent Bundick, 2007. "Do federal funds futures need adjustment for excess returns? a state-dependent approach," Research Working Paper RWP 07-08, Federal Reserve Bank of Kansas City.
  19. 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.
  20. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  21. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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