Interest rate risk hedging demand under a Gaussian framework
AbstractThis article analyzes the state variables Merton-Breeden hedging demand for an investor endowed with a utility function over both intermediate consumption and terminal wealth. Based on the three-factor model of Babbs and Nowman (1999), we show that this demand can be simply expressed as weighted average zero-coupon bonds sensitivities to these factors. The weighting parameter is actually the proportion of wealth our investor sets aside for future consumption rather than for terminal wealth.
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 28 (2010)
Issue (Month): ()
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Merton-Breeden hedging demand; interest rate risk; expected utility maximization; intermediate consumption; terminal wealth;
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- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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