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Interest rate risk hedging demand under a Gaussian framework

Author

Listed:
  • Sami Attaoui

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

  • Pierre Six

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

This 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Sami Attaoui & Pierre Six, 2010. "Interest rate risk hedging demand under a Gaussian framework," Post-Print hal-00826291, HAL.
  • Handle: RePEc:hal:journl:hal-00826291
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    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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