TY - JOUR
T1 - The effectiveness of interest-rate futures contracts for hedging Japanese bonds of different credit quality and duration
AU - Young, Martin
AU - Hogan, Warren
AU - Batten, Jonathan
PY - 2004/3
Y1 - 2004/3
N2 - 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.
AB - 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.
KW - Debt futures contracts
KW - Hedge ratios
KW - Japanese bonds
UR - http://www.scopus.com/inward/record.url?scp=1642304293&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2004.01.006
DO - 10.1016/j.irfa.2004.01.006
M3 - Article
AN - SCOPUS:1642304293
VL - 13
SP - 13
EP - 25
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
SN - 1057-5219
IS - 1
ER -