The effectiveness of interest-rate futures contracts for hedging Japanese bonds of different credit quality and duration [An article from: International Review of Financial Analysis]

by M. Young, W. Hogan, J. Batten

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This digital document is a journal article from International Review of Financial Analysis, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
This study investigates the effectiveness of the Tokyo Stock Exchange (TSE)-traded Japanese 10-year JGB futures contract to hedge portfolios of Japanese bonds of differing maturity and credit quality. The bond portfolios examined are Government, AAA-, and AA-rated Eurobonds with maturities of 2, 3, 5, 7, 10, and 20 years. Consistent with the recent literature, the study employs univariate methods for calculating hedge ratios based on levels, first differences, and percentage change of each series. Out-of-sample forecasting is used to determine the effectiveness of the calculated hedge ratios for each of the bond portfolios and to determine which approach to calculating hedge ratios is the most effective. The results show that this particular futures contract does provide a good hedge, particularly for those bond terms closest to the 10-year term of the contract. There is some evidence, although not strong, that JGBs are better hedged than AAA and AA bonds. Investors should take some caution when using this futures contract to hedge bond portfolios of different maturities and credit ratings.

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