Hedging interest rate risk with multivariate GARCH

Eduardo Rossi, Claudio Zucca

Research output: Contribution to journalArticlepeer-review

Abstract

This paper deals with the estimation of optimal hedge ratios. Three alternative hedging strategies are considered: duration matching, least squares hedge estimator and asymmetric multivariate GARCH. Hedging performance comparisons, in terms of ex-post variance portfolio reduction, are conducted. The portfolio analysed is composed by Italian Government Bonds. The hedging instrument is the nearby futures contract traded on LIFFE. Eventually, a dynamic hedging strategy is proposed in which the potential risk reduction is more than enough to offset the transaction costs.

Original languageEnglish
Pages (from-to)241-251
Number of pages11
JournalApplied Financial Economics
Volume12
Issue number4
DOIs
Publication statusPublished - 2002

ASJC Scopus subject areas

  • Geography, Planning and Development

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