Hedging interest rate risk with multivariate GARCH

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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.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603100110088094

Publication date: April 1, 2002

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