Forward and Future Prices with Markovian Interest-Rate Processes
Posted: 27 Oct 1999
Abstract
We derive a closed-form expression for the difference between forward and futures prices in the framework of a Lucas equilibrium model. We calculate this difference for fixed income securities in two ways: (1) using historic interest-rate data to calibrate the matrix of nominal state prices, and (2) testing a large sample of randomly generated state price matrices. In both cases we find few meaningful differences between forward and futures prices. Larger differences are generated from highly diagonal state-price matrices. We conclude that in economically relevant circumstances the cost of marking to market for fixed income securities are negligible.
JEL Classification: G13
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