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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

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  • David Watt

Abstract

This 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.

Suggested Citation

  • David Watt, 1997. "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," Staff Working Papers 97-18, Bank of Canada.
    • Handle: RePEc:bca:bocawp:97-18
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    References listed on IDEAS

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    More about this item

    Keywords

    FINANCIAL MARKET ; INTEREST RATE;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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