Extracting the Expected Path of Monetary Policy From Futures Rates

Federal funds and eurodollar futures contracts are among the most useful instruments for deriving expectations of the future path of monetary policy. However, reading policy expectations from those instruments is complicated by the presence of risk premia. This paper demonstrates how to extract the expected policy path under the assumption that risk premia are constant over time, and under a simple model that allows risk premia to vary. In the latter case, the risk premia are identified under the assumption that policy expectations level out after a long enough horizon. The results provide evidence that the risk premia on these futures contracts vary over time. The impact of this variation is fairly limited for futures contracts with short horizons, but it increases as the horizon of the contracts lengthens. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:733–754, 2004     

Option volume and volatility response to scheduled economic news releases

In this article, we examine the impact of 21 different types of scheduled macroeconomic news announcements on S&P 100 stock‐index option volume and implied volatility. We find that there is a 2‐h delay after the announcement before volume increases. However, there is an immediate increase in volatility, which slowly dissipates over several hours. Further analysis shows that most of the high volume and volatility after announcements come from the announcements that are considered bad news. That is, bad news creates high volatility and high volume, whereas good news elicits lower volume and is not associated with higher volatility. These results are not consistent with the predictions of any one model. We also find that the announcements that cause the largest reaction in the equity option market are Consumer Credit, Consumer Spending, Factory Inventories, NAPM, and Non‐Farm Payrolls. Six other announcements elicit a mild response. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:315–345, 2003     

The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector

Asian‐Basket‐type moving‐window contracts are an increasingly used risk‐management tool in the North American hog sector. The moving‐window contract is decomposed into a portfolio of a long Asian‐Basket put and a short Asian‐Basket call option. A projected break‐even price is used to determine the floor price, and then Monte Carlo simulation methods are used to price both a moving‐ and a fixed‐window contract. These methods provide unbiased pricing of fixed‐ and moving‐window hog‐finishing contracts of 1‐year duration. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1047–1073, 2003     

Life insurance for endowment--great concept or a booby trap?

Life insurance as a charitable gift is an attractive alternative. But first the fund raiser must check out the companies and the different types of policies available.     

A note on the speculative demand for money

In the General Theory, Keynes argued that expectations about future bond prices tend to be “sticky”. A rise in bond prices causes more investors to “join the bear brigade” and so increases the aggregate demand for money. Since Tobin's classic article on liquidity preference, this explanation of the downward sloping demand for money curve has largely disappeared from the literature. This note introduces sticky expectations into the Tobin framework. It shows that the existence of such stickiness does not necessarily cause the demand for money to be more elastic because investors have expectations about the variance of future bond prices as well as about their mean. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth.