Hedging interest rate risk with multivariate GARCH
Authors: Rossi, Eduardo; Zucca, Claudio
Source: Applied Financial Economics, Volume 12, Number 4, 1 April 2002 , pp. 241-251(11)
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.
Document Type: Research Article
Publication date: 2002-04-01