What do Swiss franc Libor futures really tell us?
Lucas Marc Fuhrer, Basil Guggenheim and Matthias Jüttner
E43, E44, E52
Term premium, Libor futures, Swiss franc
This paper sheds light on Swiss franc Libor futures, which are often used to measure interest rate expectations. We show that the diﬀerences between Libor futures and realized rates (excess returns) are, on average, positive over the last 25 years. Using interest rate surveys, we decompose excess returns into a (forward) term premium and forecast errors. The decomposition reveals that the bulk of excess returns arises from forecast errors, while the term premium is time varying but on average zero. We ﬁnd that the term premium positively correlates with the business cycle, interest rate developments, and in absolute values increases with interest rate uncertainty. Our ﬁndings suggest that Libor futures should be adjusted by the term premium to extract risk-neutral interest rate expectations.