Intraday data and hedging efficiency in interest spread trading

Christian Dunis and Pierre Lequeux

The European Journal of Finance, 2000, vol. 6, issue 4, 332-352

Abstract: Three government bond futures contracts and their respective 3-month interest rate futures contracts traded on LIFFE are examined. The data period covers three years of observations, January 1994-December 1996, sampled at half-hourly intervals. Borrowing from the calculation of minimum variance hedge ratios, half-hourly minimum variance spread ratios (the ratio of one contract to another, which provides the minimum variance) are estimated for the above contracts. The hypothesis under examination is whether there is any value-added in estimating minimum spread ratios based on intraday data. Three spread ratios are defined: two ratios calculated from daily data and a third one based on intraday data. Evidence tends to indicate that spread ratios calculated from intraday data exhibit a substantially lower variance than the other two spread ratio speciications. Thus, it is shown that intraday data, in comparison with daily data, allow for lower hedging costs. Moreover, the use of intraday-based spread ratios might be a contributing factor to reducing the maximum cumulative loss potentially incurred while holding a spread position.

Keywords: Government Bond Futures Interest Rate Futures Intraday Data Hedging Efficiency Spread Ratios (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/13518470050195100

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