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Hedging Interest Rate Risk with Multivariate GARCH

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Author Info
Rossi, Eduardo
Zucca, Claudio

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Abstract

This paper deals with the estimation of optimal hedge ratios. Three alternative hedging strategies are considered: duration matching, least squares hedge estimator and asymmetric multivariate GARCH. Hedging performance comparisons, in terms of ex-post variance portfolio reduction, are conducted. The portfolio analysed is composed by Italian Government Bonds. The hedging instrument is the nearby futures contract traded on LIFFE. Eventually, a dynamic hedging strategy is proposed in which the potential risk reduction is more than enough to offset the transaction costs. Copyright 2002 by Taylor and Francis Group

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 12 (2002)
Issue (Month): 4 (April)
Pages: 241-51
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Handle: RePEc:taf:apfiec:v:12:y:2002:i:4:p:241-51

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  1. Abdulnasser Hatemi-J & Eduardo Roca, 2006. "Calculating the optimal hedge ratio: constant, time varying and the Kalman Filter approach," Applied Economics Letters, Taylor and Francis Journals, vol. 13(5), pages 293-299, April. [Downloadable!] (restricted)
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