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Dynamic hedging of paper with T bill futures
Author(s) -
Koutmos Gregory,
Pericli Andreas
Publication year - 1998
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/(sici)1096-9934(199812)18:8<925::aid-fut3>3.0.co;2-k
Subject(s) - futures contract , economics , econometrics , utility maximization , replicating portfolio , variance (accounting) , maximization , computer science , microeconomics , mathematical economics , financial economics , portfolio , portfolio optimization , accounting
Despite the growing importance of the commercial paper market there is no empirical work investigating the hedging performance of dynamic hedging strategies versus traditional static hedging strategies. This article proposes a dynamic hedging model for commercial paper that takes advantage of time dependencies present in the joint density of commercial paper and T‐bill futures. The hedging effectiveness of the dynamic model is compared to that of the static regression model. There is clear evidence that dynamic hedging is superior to static hedging in terms of both total variance reduction and expected utility maximization. These results hold even when transactions costs are explicitly taken into account. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:925–938, 1998