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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
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    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.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1475-7702&volume=9&issue=1&articleid=1840480&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 9 (2010)
    Issue (Month): 1 (February)
    Pages: 88 - 110

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    Handle: RePEc:eme:rafpps:v:9:y:2010:i:1:p:88-110

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    1. 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 623-30, November.
    2. 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 109-24, April-Jun.
    3. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    4. 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 116-31, February.
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