Abstract
This chapter extends the results presented in Chapter 2 to further interest rate hedging models. We present the results of explicitly accounting for the variance of the model errors displayed by each zero rate. We find out that the reduction in both the hedging errors and the transaction costs is substantial: the errors are reduced on average by 17% for the PCA model, by 39% for the KRD model and by 53 % for the DV model. What is perhaps more important is that the error adjustment makes the optimal weights of the hedging strategies far more stable. Also, we do find that the error-adjusted PCA model systematically outperforms all alternative models. Finally, this chapter shows that bond futures can effectively be used to hedge the yield curve risk of a bond portfolio.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Editor information
Editors and Affiliations
Copyright information
© 2016 Nicola Carcano and Hakim Dall’O
About this chapter
Cite this chapter
Carcano, N., Dall’O, H. (2016). Alternative Models for Hedging Yield Curve Risk: An Empirical Comparison. In: Adesi, G.B., Carcano, N. (eds) Modern Multi-Factor Analysis of Bond Portfolios: Critical Implications for Hedging and Investing. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-137-56486-3_3
Download citation
DOI: https://doi.org/10.1007/978-1-137-56486-3_3
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-85024-2
Online ISBN: 978-1-137-56486-3
eBook Packages: Economics and FinanceEconomics and Finance (R0)