The Performance of the Euribor Futures Market: Efficiency and the Impact of ECB Policy Announcements

The hypothesis that futures rates are unbiased and efficient predictors of future spot interest rates has been one of the most controversial topics in the empirical literature on market efficiency. The first part of this article concentrates on the question of whether the hypothesis that rates are unbiased holds for the 3-month Euribor futures market. The empirical analysis differs from usually applied tests in its employment of a panel estimation approach, which enables the use of all daily futures rates from December 1998 to December 2001. The second part of this article analyzes the impact of ECB monetary policy news on the volatility and the prediction error of the Euribor futures rates. As interest rate futures are regarded as the market’s expectations of future interest rates, the day-to-day volatility of the Euribor futures rates can be used to draw conclusions as to whether ECB monetary policy decisions are fully anticipated by market participants. The analysis of the change of the prediction error between two days serves the detection whether the ECB monetary announcements improves or worsens in general the interest rate forecast. ∗ZEI Center for European Integration Studies †University of Bonn, Indiana University, and CEPR