Title page for ETD etd-05172009-164115

Type of Document Dissertation
Author Shynkevich, Andrei
URN etd-05172009-164115
Title Three Essays on the Interest Rate Futures Differential 1. Empirical Investigation of the Size and the Nature of the Eurodollar Futures-Forward Differential 2. Decomposition of the Interest Rate Forward-Futures Price Differential 3. How Much Premium Is There for Interest Rate Futures?
Degree Doctor of Philosophy (Ph.D.)
Department Finance (Business Administration)
Advisory Committee
Advisor Name Title
Don M. Chance Committee Chair
C. Wei Li Committee Member
Eric T. Hillebrand Committee Member
Ji-Chai Lin Committee Member
Hui-Hsiung Kuo Dean's Representative
  • Eurodollar futures
  • forward-futures differential
  • convexity adjustment
  • marking-to-market
  • interest rate term structure
Date of Defense 2009-04-15
Availability unrestricted
This dissertation analyzes a series of issues that surround both the theoretical modeling and the

empirical estimation of the forward-futures differential, commonly known as the convexity

adjustment. Opposite to theoretical implication, I find that the magnitude of the forward-futures

rate differential is much smaller than what was expected, and that its sign is negative on many

occasions. Neither asynchronicity bias, nor the unconventional feature of the Eurodollar futures

pricing can explain the observed phenomena. The term structure interpolation error and the two

business day lag between the fixing (settlement) date and the transaction (value) date to which

the implied forward rates and prices are applied cannot be attributed to the observed abnormality

either. I further show that the difference between the implied forward price obtained from the

spot rate term structure and the original Eurodollar futures price at any point of time before maturity is composed of two parts: the element due to marking-to-market and the element arisen from the unconventional settlement of the Eurocurrency futures. It is also demonstrated that the discrepancy between the forward price and the futures price arisen from the unconventional

settlement of the Eurocurrency futures can be hedged using a specific basket of caplets. This

paper also performs the analysis for the three most traded interest rate futures contracts in

Europe: EURIBOR futures, short sterling futures and Euroswiss franc futures. I show that the

futures premium is barely detectible for the contracts with maturities below one year. The futures premium for maturities above twelve months varies across the models and is a subject to model

assumptions regarding the volatility input and its evolution. Finally, I show that in the presence

of the limits to arbitrage the rate on a forward rate agreement (FRA) contract and the respective

implied forward rate derived from the spot yield curve would differ and their difference increases

with the maturity. This finding allows to challenge the results in recently published works that argue that the convexity adjustment is not priced in by the FRA market makers.

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