Hedge Effectiveness and Efficiency in the Municipal Market

Patrick J. Cusatis

Municipal Finance Journal, 2009, vol. 30, issue 2, 49 - 70

Abstract: This study examines hedge effectiveness and efficiency in the municipal bond market, comparing the use of SIFMA swaps, LIBOR swaps, and U.S. Treasury futures as hedges for municipal notes and bonds in the period since the municipal bond futures contract was eliminated. It compares the effectiveness of each of the hedge instruments with 10-year and 30-year maturities over the six-year period from 2003 to 2008. During most of the period, there was no single most effective hedge. Recently, however, SIFMA swaps have become a more effective hedge for 10-year maturities and 30-year maturities. Although SIFMA swaps dominate other hedge alternatives, the hedge efficiency is weak. Overall, the results suggest that the municipal market is in need of a dominant hedge vehicle and has suffered from the loss of the municipal futures contract.

Date: 2009
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