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The evaluation of the Canadian BAX contract in managing short‐term interest rate exposure

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  • John J. Siam
  • S.M. Khalid Nainar

Abstract

Purpose - The purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short‐term interest rate exposure. Design/methodology/approach - The paper adopts GARCH methodology to model the time‐varying nature of the volatility of prices in the context of hedging and presents a time‐varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments. Findings - The key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor. Originality/value - The paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short‐term interest rate exposure for both domestic and international investors.

Suggested Citation

  • John J. Siam & S.M. Khalid Nainar, 2010. "The evaluation of the Canadian BAX contract in managing short‐term interest rate exposure," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 9(1), pages 88-110, February.
    • Handle: RePEc:eme:rafpps:v:9:y:2010:i:1:p:88-110
    DOI: 10.1108/14757701011019835
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    References listed on IDEAS

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    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-630, November.
    3. Baillie, Richard T. & Bollerslev, Tim, 1990. "A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 309-324, September.
    4. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
    5. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    6. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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