Doctor of Philosophy (PhD)


Finance (Business Administration)

Document Type



This dissertation analyzes a series of issues that surround both the theoretical modeling and the empirical estimation of the forward-futures differential, commonly known as the convexity adjustment. Opposite to theoretical implication, I find that the magnitude of the forward-futures rate differential is much smaller than what was expected, and that its sign is negative on many occasions. Neither asynchronicity bias, nor the unconventional feature of the Eurodollar futures pricing can explain the observed phenomena. The term structure interpolation error and the two business day lag between the fixing (settlement) date and the transaction (value) date to which the implied forward rates and prices are applied cannot be attributed to the observed abnormality either. I further show that the difference between the implied forward price obtained from the spot rate term structure and the original Eurodollar futures price at any point of time before maturity is composed of two parts: the element due to marking-to-market and the element arisen from the unconventional settlement of the Eurocurrency futures. It is also demonstrated that the discrepancy between the forward price and the futures price arisen from the unconventional settlement of the Eurocurrency futures can be hedged using a specific basket of caplets. This paper also performs the analysis for the three most traded interest rate futures contracts in Europe: EURIBOR futures, short sterling futures and Euroswiss franc futures. I show that the futures premium is barely detectible for the contracts with maturities below one year. The futures premium for maturities above twelve months varies across the models and is a subject to model assumptions regarding the volatility input and its evolution. Finally, I show that in the presence of the limits to arbitrage the rate on a forward rate agreement (FRA) contract and the respective implied forward rate derived from the spot yield curve would differ and their difference increases with the maturity. This finding allows to challenge the results in recently published works that argue that the convexity adjustment is not priced in by the FRA market makers.



Document Availability at the Time of Submission

Release the entire work immediately for access worldwide.

Committee Chair

Don M. Chance