Canadian Short-Term Interest Rates and the BAX Futures Markets: An Analysis of the Impact of Volatility on Hedging Activity and the Correlation of Returns Between Markets
AbstractThis paper analyses how Canadian financial firms manage short-term interest rate risk through the use of BAX futures contracts. The results show that the most effective hedging strategy is, on average, a static strategy based on linear regression that assumes constant variances, even though dynamic models allowing for time-varying variances are found to have superior explanatory power. The results also show a rise in the correlation of the returns to three-month bankers' acceptances and three-month treasury bills with the returns to BAX futures contracts during periods of increased money market volatility, suggesting that hedging activity should increase during market volatility.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 97-18.
Length: 45 pages
Date of creation: 1997
Date of revision:
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FINANCIAL MARKET ; INTEREST RATE;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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