Return Predictability in Federal Funds Futures: Is it there?
Authors: Sigurd Anders Muus Steffensen (Aarhus University)
Title: Return Predictability in Federal Funds Futures: Is it there?
Abstract: This paper re-examines the performance of the variables suggested to be good predictors of excess returns in federal funds futures. I show that they are unstable, and do not consistently outperform the expectations hypothesis (EH) benchmark when evaluated out-of-sample. To accommodate this instability, I apply forecasting methods that combine the information of all predictors at once, and find that this produces statistically significant out-of-sample R2 statistics. Further, I assess the economic value of this forecasting ability in terms of mean-variance profitability and risk-adjusted monetary policy forecast. Results from both analyses are favorable to the EH, suggesting that predictable deviations from the EH are not economically significant in federal funds futures, and that the contracts do not require adjustment for time-varying excess returns when they are used as measures of monetary policy expectations.