Seasonality in One-Month LIBOR Derivatives

We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in onemonth LIBOR. The cash market rate increase passes through to derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the derivative contract, these derivative contracts provide biased forecasts of both future interest rates and their volatility. The turn-of-the-year effect appears to contribute to the bias in the futures contract but not in the options contract. The information in the derivatives almost always subsumes simple benchmark forecasts. The authors thank Charles Hokayem and Joshua Ulrich for research assistance. The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. The second author thanks the Federal Reserve Bank of St. Louis, where he was a visitor when this work started. Seasonality in One-Month LIBOR Derivatives