Interest rate volatility, trading volume, and the hedging performance of T-bond and GNMA futures—A note
✍ Scribed by Shantaram P. Hegde; Kenneth P. Nunn Jr.
- Publisher
- John Wiley and Sons
- Year
- 1985
- Tongue
- English
- Weight
- 728 KB
- Volume
- 5
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
he volatility of interest rates has increased markedly since October of 1979, T leading to a tremendous surge in the volume of trading in interest rate futures.
Investigating the effects of the increased volume on the hedging peaormance of futures contracts, Hegde (1982) finds that the hedging effectiveness and the hedge ratio have increased recently. Besides, he reports that the hedging performance of futures contracts is affected by the term to maturity and the level of default risk of the spot bond being hedged, and the type of futures contract and its term to delivery.
In a recent study Kuberek and Pefley (1983) find that the T-bond futures (TBF) of the Chicago Board of Trade are more effective in cross-hedging higher-quality (AAA and AA rated) corporate bonds than A rated bonds, and that their effectiveness declines consistently as the term to delivery of the contract lengthens. While these results are interesting, what both the studies lack is a statistical test and analysis that would shed light on the strength of effect of these factors on the hedging and cross-hedging performance of futures instruments.
The objective of this note is to present a multivariate analysis of the hedging and cross-hedging performance of the TBF and the GNMA (CDR) futures (GMF) contracts. The multivariate model employed here seeks to explain the hedging effectiveness of futures contracts and their hedge ratios in terms of five factors: interest rate volatility, futures trading volume, term to maturity and default risk of spot bond, type of futures instrument, and distance to delivery of contracts. We find that