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Year-End Seasonality in One-Month LIBOR Derivatives

Christopher J. Neely and Drew B. Winters
The Journal of Derivatives Spring 2006, 13 (3) 47-65; DOI: https://doi.org/10.3905/jod.2006.616867
Christopher J. Neely
A research officer at the Federal Reserve Bank of St. Louis, St. Louis, MO.
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  • For correspondence: neely@stls.frb.org
Drew B. Winters
Professor of Finance at Texas Tech University, Rawls College of Business, Lubbock, TX.
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  • For correspondence: Drew.Winters@ttu.edu
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Abstract

The January effect in the stock market is well-known. Many markets have also been found to exhibit distinct day of the week effects or seasonal patterns. A less well-known but surprisingly strong end of year phenomenon occurs in LIBOR during the month of December. As Neely and Winters show, the daily average LIBOR is more than 30 basis points higher during December than the rest of the year, and volatility is about twice as high. The article examines whether the interest rate futures and options markets fully reflect this effect, and the strong conclusion is that they do, mostly, and so does the embedded forward rate in the LIBOR term structure. Neely and Winters find that the futures market in general is not a fully efficient predictor of future spot LIBOR, and December is a little worse than the other months, but only by a little. As is typical in such tests, implied volatility in futures options is also found to be a biased estimate of future volatility, but again, December is not different from other months. The overall conclusion is that even though the futures and options markets provide biased forecasts of the future level and volatility of LIBOR, they do seem to capture the end of the year pattern quite well.

TOPICS: Interest-rate and currency swaps, futures and forward contracts

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Year-End Seasonality in One-Month LIBOR Derivatives
Christopher J. Neely, Drew B. Winters
The Journal of Derivatives Feb 2006, 13 (3) 47-65; DOI: 10.3905/jod.2006.616867

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Year-End Seasonality in One-Month LIBOR Derivatives
Christopher J. Neely, Drew B. Winters
The Journal of Derivatives Feb 2006, 13 (3) 47-65; DOI: 10.3905/jod.2006.616867
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