Accessible Version
A Simple Macro-Finance Measure of Risk Premia in Fed Funds Futures Accessible Data
Figure 1: Existing Measures of Short Horizon Term Premia
This figure shows the 6-month term premia for three different measures. The first measure is the gap between Fed Funds Futures and the Blue Chip Median Forecast. The second measure is the forward term premium derived from the OIS-ZLB model. And the third measure is the Piazzesi and Swanson (2009) measure. This figure shows that the measures differ significantly over time but each has been more negative since the financial crisis.
Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Figure 2: Realized returns of 6-month Fed Funds Futures minus Fed Funds rate 6 months ahead
This figure shows that the realized return for 6-month Fed Funds Futures minus Fed Funds rate 6 months ahead tends to sharply rise in the midst of recesssions.
Note: Shaded bars indicate periods of business recession as defined by the NBER: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Figure 3: Negative Covariances between Real Activity and Nominal Measures
This figure shows 120 lines that are plotted reflecting all of the negative covariances used in the regressions for the model averaging. The 120 lines (20 x 2 x 3) reflect 20 different window lengths ranging from 1 to 20 years, with two possible real activity measures (industrial production 12-mo percent change and non-farm payrolls 12-month percent change) and three nominal measures (the federal funds rate, CPI-U, PCE-all inflation). The solid vertical blue line reflects the beginning of the full in-sample period of 1988:10 to 2018:08. The thick solid black (thick dotted black) line reflects the average (median) of the 120 covariances at each time period.
Note: Shaded bars indicate periods of business recession as defined by the NBER: December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Figure 4: Predicted Term Premia (6 months)
Plotted are the 6-month predicted in-sample term premia (solid red) based on model averaging using equal weights. The dark-gray dashed line represents the difference at the 6-month horizon between the Fed funds futures and the Blue Chip median forecast, in basis points per month. The in-sample estimation period extends from 1988:10 to 2018:08. Predicted term premia for other maturities are roughly consistent and shown in the Appendix.
Note: Shaded bars indicate periods of business recession as defined by the NBER: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.
Figure 5: Predicted Term Premia (3-9 months) Diercks & Carl Measure and OIS-ZLB
Plotted are the 3- to 9-month predicted term premia based on model averaging using equal weights. The OIS-ZLB forward term premia are labeled in the legend by month of maturity. The in-sample estimation period extends from 1988:10 to 2018:08. This figure shows that the term premium across each maturity for the Diercks and Carl measure was positive up until 2002. After 2002, they became negative. Both the OIS-ZLB and Diercks and Carl measure have been consistently negative since 2015, although the OIS-ZLB measure has been considerably more negative.
Note: Shaded bars indicate periods of business recession as defined by the NBER: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.