Relative Pricing of Eurodollar Futures and Forward Contracts




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    • Grinblatt is from the Anderson School at UCLA. Jegadeesh is from the University of Illinois, Urbana-Champaign College of Commerce & Business Administration. The authors thank the UCLA Academic Senate and the UIUC Research Board for research support, as well as the editor René Stulz, an anonymous referee, Michael Brennan, Jim Cataldo, Avraham Kamara, Toby Moskowitz, Avanidhar Subrahmanyam, Walter Torous, Jiang Wang, and seminar participants at Penn State, Boston College, the University of California at Berkeley, Stanford University, and the 1994 Western Finance Association meetings for comments on earlier drafts. They also thank Richard Aspinwall, Ed Kane, Ed Kleinbard, Ananth Madhavan, John Meriwether, Dennis O'Callahan, Brian Pennington, Venkat Ramdev, and Myron Scholes for sharing their insights on this topic. Finally, special gratitude goes out to Francis Longstaff for many helpful discussions.


Past research explains observed spreads between futures and forward Eurodollar yields as being due to the futures contract's mark-to-market feature. We derive closed form solutions for this yield spread and show that, theoretically, it should be small. Also, differences in liquidity, taxation, and default risk cannot account for the large spreads observed. We also present evidence that the spreads, which are nonnegligible primarily in the first half of the sample period, are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time.