Predicting Short-Term Eurodollar Futures

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Executive Summary

The authors of this paper propose and illustrate a structural model for the forward curve produced by Eurodollar futures contracts. The model provides a three-part functional decomposition of the forward rate: a long-term, unconditional component, a maturity-specific component, and a date-specific component. The maturity-specific component captures preferred investment habitats, and the date-specific component captures shocks to expectations of future spot rates. These functional components (modeled with exponential basis functions) of the decomposition aggregate to an arbitrage-free representation of the underlying stochastic process that drives the evolution of the Eurodollar forward curve.

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