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Hedging Against the Interest-rate Risk by Measuring the Yield-curve Movement

  • Zhongliang Tuo
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    By adopting the polynomial interpolation method, we propose an approach to hedge against the interest-rate risk of the default-free bonds by measuring the nonparallel movement of the yield-curve, such as the translation, the rotation and the twist. The empirical analysis shows that our hedging strategies are comparable to traditional duration-convexity strategy, or even better when we have more suitable hedging instruments on hand. The article shows that this strategy is flexible and robust to cope with the interest-rate risk and can help ?fine-tune a position as time changes.

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    File URL: http://arxiv.org/pdf/1312.6841
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    Paper provided by arXiv.org in its series Papers with number 1312.6841.

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    Date of creation: Dec 2013
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    Handle: RePEc:arx:papers:1312.6841
    Contact details of provider: Web page: http://arxiv.org/

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    1. Miles Livingston & Lei Zhou, 2005. "Exponential Duration: A More Accurate Estimation Of Interest Rate Risk," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 343-361.
    2. Athanasios Orphanides & Min Wei, 2010. "Evolving macroeconomic perceptions and the term structure of interest rates," Finance and Economics Discussion Series 2010-01, Board of Governors of the Federal Reserve System (U.S.).
    3. Hans Dewachter & Marco Lyrio, 2003. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series ces0304, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
    4. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
    5. Pesando, James E, 1979. "On the Random Walk Characteristics of Short- and Long-Term Interest Rates in an Efficient Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 457-66, November.
    6. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
    7. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    8. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
    9. Agca, Senay, 2005. "The Performance of Alternative Interest Rate Risk Measures and Immunization Strategies under a Heath-Jarrow-Morton Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(03), pages 645-669, September.
    10. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
    11. Emanuele Bajo & Massimiliano Barbi & David Hillier, 2013. "Interest rate risk estimation: a new duration-based approach," Applied Economics, Taylor & Francis Journals, vol. 45(19), pages 2697-2704, July.
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