PT - JOURNAL ARTICLE AU - Choong Tze Chua AU - Krishna Ramaswamy AU - Robert A Stine TI - Predicting Short-Term Eurodollar Futures AID - 10.3905/JFI.2009.18.4.047 DP - 2009 Mar 31 TA - The Journal of Fixed Income PG - 47--61 VI - 18 IP - 4 4099 - https://pm-research.com/content/18/4/47.short 4100 - https://pm-research.com/content/18/4/47.full AB - We propose and illustrate a structural model for the forward curve produced by Eurodollar futures contracts. Our model provides a three-part functional decomposition of the forward rate: a long-term, unconditional component, a maturity-specific component, and a date-specific component. The maturity-specific component captures preferred investment habitats, and the date-specific component captures shocks to expectations of future spot rates. These functional components (modeled with exponential basis functions) of the decomposition aggregate to an arbitrage-free representation of the underlying stochastic process that drives the evolution of the Eurodollar forward curve. We demonstrate the use of this approach by fitting this model to yields over the period 12/9/1981 to 1/28/2008. The estimation is accomplished by using a Kalman filter to determine the underlying representation. The estimated yield curve provides better out-of-sample predictions than the standard random walk model in forecasts over various horizons. We further show the profitability of a trading scheme that chooses futures positions based upon the anticipated forward curve.TOPICS: Futures and forward contracts, currency, developed markets [Europe], statistical methods