Convexity Bias in Eurodollar Futures Prices: A Dimension-Free HJM Criterion

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dc.contributor.authorPozdnyakov, Vladimir
dc.contributor.authorSteele, John M
dc.date2023-05-17T15:09:09.000
dc.date.accessioned2023-05-23T00:17:02Z
dc.date.available2023-05-23T00:17:02Z
dc.date.issued2009-12-01
dc.date.submitted2016-07-27T09:04:00-07:00
dc.description.abstractIn the theory of interest rate futures, the difference between the futures rate and forward rate is called the “convexity bias,” and there are several widely offered reasons why the convexity bias should be positive. Nevertheless, it is not infrequent that the empirical the bias is observed to be negative. Moreover, in its most general form, the benchmark Heath–Jarrow–Morton (HJM) term structure model is agnostic on the question of the sign of the bias; it allows for models where the convexity bias can be positive or negative. In partial support of the practitioner’s arguments, we develop a simple scalar condition within the HJM framework that suffices to guarantee that the convexity bias is positive. Moreover, when we check this condition on the LIBOR futures data, we find strong empirical support for the new condition. The empirical validity of the sufficient condition and the periodic observation of negative bias, therefore leads one to a paradoxical situation where either (1) there are arbitrage possibilities or (2) a large subclass of HJM models provide interest rate dynamics that fail to capture a fundamental feature of LIBOR futures.
dc.identifier.urihttps://repository.upenn.edu/handle/20.500.14332/42268
dc.legacy.articleid1234
dc.legacy.fields10.1007/s11009-008-9082-6
dc.legacy.fulltexturlhttps://repository.upenn.edu/cgi/viewcontent.cgi?article=1234&context=oid_papers&unstamped=1
dc.rights<p>The final publication is available at Springer via http://dx.doi.org/10.1007/s11009-008-9082-6</p>
dc.source.beginpage551
dc.source.endpage560
dc.source.issue76
dc.source.journalOperations, Information and Decisions Papers
dc.source.journaltitleMethodology and Computing in Applied Probability
dc.source.peerreviewedtrue
dc.source.statuspublished
dc.source.volume11
dc.subject.otherHeath–Jarrow–Morton model
dc.subject.othereurodollar futures
dc.subject.otherconvexity bias
dc.subject.otherfutures rate
dc.subject.otherforward rate
dc.subject.otherOther Applied Mathematics
dc.subject.otherOther Computer Engineering
dc.subject.otherTheory and Algorithms
dc.titleConvexity Bias in Eurodollar Futures Prices: A Dimension-Free HJM Criterion
dc.typeArticle
digcom.contributor.authorPozdnyakov, Vladimir
digcom.contributor.authorSteele, John M
digcom.identifieroid_papers/76
digcom.identifier.contextkey8886385
digcom.identifier.submissionpathoid_papers/76
digcom.typearticle
dspace.entity.typePublication
upenn.schoolDepartmentCenterOperations, Information and Decisions Papers
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