What do Swiss franc Libor futures really tell us?

This paper sheds light on Swiss franc Libor futures, which are often used to measure interest rate expectations. We show that the differences between Libor futures and realized rates (excess returns) are, on average, positive over the last 25 years. Using interest rate surveys, we decompose excess re...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Fuhrer, Lucas Marc, Guggenheim, Basil, Jüttner, Matthias
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Economic models
Futures
Interest rates
Online AccessGet full text

Cover

More Information
Summary:This paper sheds light on Swiss franc Libor futures, which are often used to measure interest rate expectations. We show that the differences between Libor futures and realized rates (excess returns) are, on average, positive over the last 25 years. Using interest rate surveys, we decompose excess returns into a (forward) term premium and forecast errors. The decomposition reveals that the bulk of excess returns arises from forecast errors, while the term premium is time varying but on average zero. We find that the term premium positively correlates with the business cycle, interest rate developments, and in absolute values increases with interest rate uncertainty. Our findings suggest that Libor futures should be adjusted by the term premium to extract risk-neutral interest rate expectations.