The Efficiency of the Treasury Bill Futures Market: An Analysis of Alternative Specifications

Until the existence of financial futures, testing the determinants and the informational content of futures market prices has been difficult because of the vagaries associated with commodity markets. In the case of Treasury bill futures, the existence of an active secondary market and the resulting term structure of interest rates enables one to test alternative hypotheses about the prices of futures contracts. This study compares two alternative specifications of equilibrium futures prices, i.e., those implied by carrying charges and those derived from the unbiased expectations hypothesis of the theory of the term structure of interest rates. In general, the results show that the overnight cost-of-carry model is better for explaining futures prices than are forward rates derived from the yield curve.