The truth about interest rate futures and forwards: Evidence from high frequency data

Abstract

This paper examines the pricing of Eurodollar futures and US dollar FRA contracts using a high frequency data set. I find the median futures/FRA differential is close to zero and the dispersion of the differential smaller than reported in prior studies using low frequency data and implied forward rates as proxies for forward rates. Arbitrage opportunities are linked to the presence of stale FRA quotes and the oscillatory behavior of FRA quotes. Inter-market information flows are found to be of much shorter duration than previously reported with the futures market playing the dominant role in the information transmission process in the shorter-dated maturities.