Working Paper: NBER ID: w15736
Authors: James D. Hamilton; Tatsuyoshi Okimoto
Abstract: 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.
Keywords: Fed Funds Futures; Expectations Hypothesis; Markov-Switching Models
JEL Codes: E40; E50; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic regimes (P19) | predictable gains from fed funds futures contracts (E43) |
| High risk premium regime (G22) | predictable gains from fed funds futures contracts (E43) |
| Weak economic activity (E39) | high risk premium regime (G22) |
| High risk premium regime (G22) | average holding gains (G11) |
| Low risk premium regime (G19) | average holding gains (G11) |
| Long horizon contracts (L14) | stronger evidence of predictable gains (G41) |