Interest Rate Risk Hedging Demand Under a Gaussian Framework

9 Pages Posted: 6 Feb 2010

See all articles by Sami Attaoui

Sami Attaoui

NEOMA Business School

Pierre Six

Neoma Business School

Date Written: February 4, 2010

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

JEL Classification: G13

Suggested Citation

Attaoui, Sami and Six, Pierre, Interest Rate Risk Hedging Demand Under a Gaussian Framework (February 4, 2010). Available at SSRN: https://ssrn.com/abstract=1548356 or http://dx.doi.org/10.2139/ssrn.1548356

Sami Attaoui

NEOMA Business School ( email )

Boulevard André Siegfried - BP 215
Mont Saint Aignan, 76825
France

Pierre Six (Contact Author)

Neoma Business School ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, Normandy 76825
France

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