Date of this Version
Methodology and Computing in Applied Probability
The traditional use of LIBOR futures prices to obtain surrogates for the Eurodollar forward rates is proved to yield a systematic bias in the pricing of Eurodollar swaps when one assumes that the yield curve is well described by the Heath-Jarrow-Morton model. The resulting theoretical inequality is consistent with the empirical observations of Burghardt and Hoskins (1995), and it provide a theoretical basis for price anomalies that are suggested by more recent empirical data.
The final publication is available at Springer via http://dx.doi.org/10.1023/A:1020693608365
Heath-Jarrow-Morton model, HJM model, interest rates, LIBOR, futures prices, arbitrage, pricing, swap, equivalent martingale measures
Pozdnyakov, V., & Steele, J. M. (2002). Convexity Bias in the Pricing of Eurodollar Swaps. Methodology and Computing in Applied Probability, 4 (2), 181-193. http://dx.doi.org/10.1023/A:1020693608365
Date Posted: 27 November 2017
This document has been peer reviewed.