Center for Quantitative Economic Research

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Sources of Variation in Holding Returns for Fed Funds Futures Contracts

James D. Hamilton and Tatsuyoshi Okimoto
CQER Working Paper 09-03
October 2009

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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.

JEL classification: E40, E50, G13

Key words: federal funds, futures, monetary policy, Markov switching

The authors are grateful to Brent Bundick and Michael Bauer for comments on an earlier draft. Okimoto thanks the JSPS Postdoctoral Fellowships for Research Abroad for financial support. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to James Hamilton, Department of Economics, University of California, San Diego, 9500 Gilman Drive, Mail Code 0508, La Jolla, CA 92093,, or Tatsuyoshi Okimoto, Hitotsubashi University, Graduate School of International Corporate Strategy, Tokyo, Japan, currently visiting at the University of California, San Diego, 9500 Gilman Drive, Mail Code 0508, La Jolla, CA 92093.

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