Interest rate futures and forwards: Evidence from the sterling futures and FRA markets

Abstract

This paper examines the pricing of sterling interest rate futures and forward rate agreement (FRA) contracts using a unique high frequency data set. The futures/FRA differential is close to zero with narrow dispersion, yielding limited arbitrage opportunities when synchronous data are employed. These results compare favorably with those reported in prior studies using low frequency data and implied forward rates. I also find that the information flow between the futures and FRA markets is largely contemporaneous although the futures market dominates the information transmission process in the 3-month maturity.