Estimates of the term premium on near-dated federal funds futures contracts

"This paper examines estimates of the term premium on federal funds futures rates, with a focus on near-dated contracts and therefore the more immediate policy horizon. The first set of methods assumes that the term premium is constant over time. Under this framework, calculations that use survey data to proxy for forecast errors produce more intuitive results than estimates based on the restrictive assumption that forecast errors average to zero over the sample. The second set of methods allows the term premium to vary over time, but the results based on the term structure of near-dated federal funds futures contracts are highly volatile, which perhaps reflects numerous technical factors in the underlying federal funds market. Finally, under an asset-pricing approach, the CAPM suggests that the risk premium on federal funds futures is either less than or equal to zero, while APT indicates that it can be positive"--Federal Reserve Board web site.