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Price discovery in short‐term interest rate markets: Futures versus swaps
Author(s) -
Frino Alex,
Garcia Michael
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21935
Subject(s) - futures contract , price discovery , term (time) , interest rate swap , economics , financial economics , interest rate derivative , interest rate , monetary economics , econometrics , physics , quantum mechanics
This study examines price discovery at the short end of the yield curve by examining the lead–lag relationship in the prices of Australian interest rate swap and bank accepted bill futures contracts. Consistent with previous research, we find strong bidirectional flows of information between swap and futures markets during daytime trading. However, the swap market leads price discovery during overnight trading while futures markets lead swap markets on macroeconomic announcement days—both new findings. We demonstrate and conclude that price discovery in derivatives at the short end of the yield curve is driven by transaction costs.