On the Relationship Between the Very Short Forward and the Spot Interest Rate

In this paper we revisit the relationship between the forward interest rate and the spot interest rate at the shortest maturities. We introduce a new set of very short forward and spot interest rates that have not been fully utilized in the literature: the "tomorrow next" rate and the "spot next" rate, both of which have the same maturity as the overnight rate. Using these interest rates we demonstrate an asymmetric predictability of the forward interest rate. This asymmetry, which we find to be robust across different money markets, depends on whether the forward rate is greater or less than the current spot rate. Money market institutions, such as a penalty for end of day overdrafts, and the inability of securities firms to procure funds in certain markets may explain the asymmetry.