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The use of term structure information in the hedging of mortgage‐backed securities
Author(s) -
Fink Jason,
Fink Kristin E.,
Lange Stephen
Publication year - 2005
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/fut.20154
Subject(s) - yield curve , treasury , futures contract , econometrics , hedge , economics , term (time) , yield (engineering) , affine term structure model , interest rate , intuition , financial economics , actuarial science , mathematics , monetary economics , physics , archaeology , epistemology , quantum mechanics , biology , materials science , metallurgy , ecology , philosophy , history
Abstract This article examines the importance of term structure variables in the hedging of mortgage‐backed securities (MBS) with Treasury futures. Koutmos, G., Kroner, K., and Pericli, A. (1998) find that the optimal hedge ratio is time varying; we determine the effect of yield levels and slopes on this variation. As these variables are closely tied with mortgage refinancing, intuition suggests them to be relevant determinants of the hedge ratio. It was found that a properly specified model of the time varying hedge ratio that excludes the level and slope of the yield curve from the information set would provide similar out‐of‐sample hedging results to a model in which term structure information is included. Thus, both the level of interest rates and the slope of the yield curve are unimportant variables in determining the empirically optimal hedge ratio between MBS and Treasury futures contracts. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:661–678, 2005