OVERREACTION AND SHORT-TERM MARKET FACTORS IN THE INTEREST RATE FUTURES MARKETS

Evidence of stock price overreaction is well documented in most stock markets, but it is quite limited in interest rate futures markets. This paper empirically investigates whether and to what degree, overreaction in interest rate future markets is influenced by recent information (short-term market factors). Using daily data from the interest rates of Eurodollar futures and U.S. T-bond futures, some degree of overreaction was found to be related to short-term market factors. These results have important implications for practitioners, i.e., the opportunity to gain abnormal returns by adopting a "contrarian" investment strategy. For hedgers, transactions are better conducted in days with normal levels of trading activity, as measured in terms of trading volume, intraday volatility, and market movement. On the contrary, professional traders, arbitrageurs, and speculators would find it more attractive to concentrate on days with abnormal levels of trading activity to exploit the larger degree of inefficiency in prices.