The BTP Futures Contracts: Interest Rate Risk Hedging and Exchange Rate Crises

Giulio Cifarelli () and Anna Calamia
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Anna Calamia: University of Rome "La Sapienza"

Giornale degli Economisti, 1998, vol. 57, issue 2, 189-211

Abstract: In turbulent time periods, the conditional covariance matrix of cash and futures prices should vary over time. The conventional regression based approach to estimate the optimal hedge could then be inappropriate. This paper investigates the hedging effectiveness of BTP futures contracts from 1991 to 1996, a period affected by three foreign exchange crises. A bivariate ARCH model for the conditional first and second moments of cash and futures price rates of change and the corresponding time-varying (optimal) hedge ratios is successfully estimated. A surprising result is that in the period which includes the 1995 financial crisis the joint distribution of cash and futures price changes does not seem to vary over time and hedge ratios obtained with the OLS regression technique do provide satisfactory results.

Keywords: financial futures; hedging effectiveness; time-varying hedge ratios; multivariate ARCH models (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Date: 1998
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