Price discovery in short-term interest rate markets: Futures versus swaps

This study examines price discovery at the short end of the yield curve by examining the lead–lag relationship in the prices of Australian interest rate swap and bank accepted bill futures contracts. Consistent with previous research, we find strong bidirectional flows of information between swap and futures markets during daytime trading. However, the swap market leads price discovery during overnight trading while futures markets lead swap markets on macroeconomic announcement days-both new findings. We demonstrate and conclude that price discovery in derivatives at the short end of the yield curve is driven by transaction costs.