Shadow Risk-Free Returns When Hedging The Interest Rate Risk
AbstractThis paper addresses the hedging of bond portfolios interest rate risk by drawing on the classical one period no-arbitrage approach of Financial Economics (Ingersoll (1987)). Under quite weak assumptions on the interest rate behavior several shadow riskless assets are introduced by means of semi-infinite mathematical programming problems. Then, these assets are interpreted as hedging strategies or, under adequate hypotheses, as immunized portfolios. The technique applies in a quite broad range of cases since, for instance, short-selling or convexity restrictions are not necessarily required and the uniqueness of the horizon planning period does not have to be imposed. The set of admissible shocks on the interest rate contains a vast number of possibilities, the solutions are robust and do not significantly depend on the random field framework affecting the interest rate, and under some conditions, derivative securities may be also included in the analysis. Furthermore, appropriate algorithms are developed in a very general mathematical setting. Finally, a few examples illustrate the way they work in practice along with the general form of the hedging portfolio.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb020501.
Date of creation: Jan 2002
Date of revision:
Other versions of this item:
- Balbás, Alejandro & Ibáñez, Alfredo & Romera, Rosario, . "Shadow risk-free returns when hedging the interest rate risk," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/134, Universidad Carlos III de Madrid.
- NEP-ALL-2003-04-09 (All new papers)
- NEP-FIN-2003-04-09 (Finance)
- NEP-FMK-2003-04-09 (Financial Markets)
- NEP-IAS-2003-04-09 (Insurance Economics)
- NEP-RMG-2003-04-09 (Risk Management)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.