IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Shadow risk-free returns when hedging the interest rate risk

Listed author(s):
  • Romera, Rosario
  • Ibáñez, Alfredo
  • Balbás, Alejandro

This 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.

If 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.

File URL:
Download Restriction: no

Paper provided by Universidad Carlos III de Madrid. Departamento de Economía de la Empresa in its series DEE - Working Papers. Business Economics. WB with number wb020501.

in new window

Date of creation: Jan 2002
Handle: RePEc:cte:wbrepe:wb020501
Contact details of provider: Web page:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cte:wbrepe:wb020501. See general 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: (Ana Poveda)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.