The Relation between Default-Free Interest Rates and Expected Economic Growth Is Stronger Than You Think.

The relation between default-free interest rates and expected economic growth is substantially stronger than suggested by extant literature. Futures-implied Treasury bill yield spreads are more highly correlated with future real consumption, investment, and GNP growth than spot spreads. This stronger relation arises because using futures removes a component of the spot term structure that covaries negatively with real economic growth. Treasury forward rates from spot bills contain a premium for the risk that short-sellers will default. This risk premium is negatively related to expected economic growth. Copyright 1997 by American Finance Association.

New Evidence on the Monday Seasonal in Stock Returns.

Equity derivatives and the institutionalization of equity markets affect the Monday seasonal. The seasonal in the Standard and Poor's 500 (S&P) declines significantly over 1962-93. This decline is positively related to the ratio of institutional to individual trading volume. In contrast, the seasonal for small stocks does not decline and is unaffected by institutional versus individual trading. Higher trading costs sustain the seasonal in small stocks and, unlike the S&P, these costs are not lower for institutions than for individuals. Futures minus spot S&P returns exhibit a reverse seasonal. Informed traders use the less costly market to exploit the seasonal. Copyright 1997 by University of Chicago Press.

Optimal Hedging in Futures Markets with Multiple Delivery Specifications.

Nearly all futures contracts allow delivery of any of several qualities of the underlyi ng asset. Consequently, the price of the futures contract is associat ed more with the price of the expected cheapest deliverable variety t han with the price of the par-delivery variety. The delivery specific ations introduce a delivery risk for every hedger in the market. The authors derive the optimal hedging strategies in these markets. Their hedging effectiveness is evaluated for wheat futures contracts in Ch icago. Hedging optimally would have significantly reduced the varianc e of the rates of return on hedges, while yielding similar mean retur ns. Copyright 1987 by American Finance Association.