Settlement Method of Eurodollar Futures and Expiration Day Effects : An Analysis of Intraday Price Volatility

Four times a year, Eurodollar futures contracts are settled by cash to a final settlement price that is tied to spot three-month LIBOR. The LIBOR used in the settlement is determined by the Chicago Mercantile Exchange after conducting two surveys of major banks on the last hour of settlement. This paper tests for abnormal changes in the volatility of Eurodollar futures prices during the time of survey on expiration days. In contrast to the recent studies on the effects of the release of public information on derivative markers, this study focuses on the release of private information. We specifically test whether private information contained in the settlement survey of the participating banks influences market activity. Volatility series are examined for expiring and nearby contracts using the price changes in fifteen minute intervals for the period June 1982 to June 1992. Once the effects of government announcements are controlled for, our results indicate that, for the expiring contracts, volatility is reduced during the time of survey. perhaps due to reduced open interest and activity near the expiration hour. However, the price volatility of the nearest contracts increases during the rime of the survey on expiration days. This effect is more pronounced at the beginning of the survey rime, between 8:00 and 8:15 Chicago time. This result sheds new light on the importance of the release of private information on derivatives markers