Forecasting interest rates from financial futures markets

The prices of financial futures contracts traded at LIFFE can be interpreted as forecasts of the three-month interest rate which will apply at the delivery date. During the period under review the contracts were traded daily for a varying number of years prior to the delivery date so that a number of contracts are priced at any one time. The paper outlines the institutional framework of the contracts and examines how prices change for 12 three-month interest contracts for each of (i) short sterling and (ii) Eurodollar. The series are tested individually for the presence of unit roots, for unbiasedness and changing volatility. Variation across series is also examined. Finally, the Eurodollar and short-sterling interest rate contracts are examined over the period 1982 to 1994 to ascertain whether the futures price is cointergrated with the realized spot price. Further tests are carried out to see if the futures price incorporates information other than that contained in the spot price.