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Hedging Corporate Bonds
Author(s) -
Ioannides Michalis,
Skinner Frank S.
Publication year - 1999
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00280
Subject(s) - bond , corporate bond , futures contract , treasury , financial economics , business , hedge , economics , credit rating , bond credit rating , maturity (psychological) , credit risk , monetary economics , financial system , actuarial science , finance , psychology , ecology , developmental psychology , archaeology , biology , history , credit reference
We examine Treasury bond and stock index futures, the swap curve and two types of hypothetical corporate bond assets as alternative hedging instruments for portfolios of corporate bonds. Conducting ex post and ex ante tests we find evidence that credit quality and maturity are important sources of basis risk when hedging corporate bonds whose credit rating are below triple A. We conclude that a new corporate hedging instrument may be useful for those wishing to hedge corporate bond portfolios provided that transaction costs are not too high relative to existing futures contracts.