Hedging bond portfolios versus infinitely many ranked factors of risk

Esperanza H. Montagut

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: The paper considers bond portfolios affected by both interest-rate- and default-risk. In order to guarantee a correct performance of our analysis we will hedge against an infinite number of factors. Hence we do not have to impose and do not depend on any assumption concerning the dynamic behavior of the term structure of interest rates. On the other hand, since a complete hedging is not feasible unless some ideal situations hold, we rank the factors according to the empirical evidence. Thus, we make the most important risks vanish and we minimize the effect of those kinds of risk less usual in practice.

Date: 2004-08
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb043312

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