Forward and Futures Prices with Markovian Interest-Rate Processes.

The authors derive a closed-form expression for the differences between forward and futures prices in the framework of a Lucas equilibrium model. They calculate this difference for fixed income securities in two ways: using historic interest-rate data to calibrate the matrix of nominal state prices and testing a large sample of randomly generated state price matrices. In both cases, the authors find few meaningful differences between forward and futures prices. Larger differences are generated from highly diagonal state-price matrices. The authors conclude that in economically relevant circumstances the costs of marking to market for fixed income securities are negligible. Copyright 1994 by University of Chicago Press.