Interest rate risk hedging demand under a Gaussian framework

Sami Attaoui and Pierre Six ()
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Pierre Six: Rouen Business School, Postal: 1, rue Marechal Juin - BP 215, 76825 Mont Saint Aignan Cedex. France., http://ssrn.com/author=950245

Journal of Financial Transformation, 2010, vol. 28, 103-107

Abstract: This article analyzes the state variables Merton-Breeden hedging demand for an investor endowed with a utility function over both intermediate consumption and terminal wealth. Based on the three-factor model of Babbs and Nowman (1999), we show that this demand can be simply expressed as weighted average zero-coupon bonds sensitivities to these factors. The weighting parameter is actually the proportion of wealth our investor sets aside for future consumption rather than for terminal wealth.

Keywords: Merton-Breeden hedging demand; interest rate risk; expected utility maximization; intermediate consumption; terminal wealth (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1419

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