Canadian Short-Term Interest Rates and the BAX Futures Markets: An Analysis of the Impact of Volatility on Hedging Activity and the Correlation of Returns Between Markets

David Watt

Staff Working Papers from Bank of Canada

Abstract: This paper analyses how Canadian financial firms manage short-term interest rate risk through the use of BAX futures contracts. The results show that the most effective hedging strategy is, on average, a static strategy based on linear regression that assumes constant variances, even though dynamic models allowing for time-varying variances are found to have superior explanatory power. The results also show a rise in the correlation of the returns to three-month bankers' acceptances and three-month treasury bills with the returns to BAX futures contracts during periods of increased money market volatility, suggesting that hedging activity should increase during market volatility.

Keywords: FINANCIAL MARKET; INTEREST RATE (search for similar items in EconPapers)
JEL-codes: E43 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:97-18

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