Hedging European Government Bond Portfolios during the Recent Sovereign Debt Crisis

51 Pages Posted: 1 Sep 2012 Last revised: 23 Oct 2014

See all articles by Wolfgang Bessler

Wolfgang Bessler

University of Hamburg

Dominik Wolff

Deka Investment GmbH; Technical University of Darmstadt; Frankfurt University of Applied Sciences

Date Written: September 3, 2014

Abstract

The sovereign debt crisis challenged investors in European government bonds to deal with volatile interest rate spreads. For managing sovereign risk, “Eurex” introduced futures contracts on Italian government bonds reflecting risks of lower rated countries. We analyze hedging strategies for bond portfolios with futures on German and Italian government bonds before and during the sovereign debt crisis and evaluate their out-of-sample hedging effectiveness. Before the crisis, German futures were efficient instruments for hedging government bond portfolios, but during the crisis, a composite hedge combining German and Italian futures was superior. Allocating bonds to high and low sovereign risk-buckets and hedging these buckets individually further enhanced the hedging efficiency.

Keywords: Sovereign Debt Crisis, Fixed Income Securities, Bond Portfolio Management, Interest Rate Futures, Hedge Ratio, Hedging Effectiveness

JEL Classification: G01, G12, G13, G15

Suggested Citation

Bessler, Wolfgang and Wolff, Dominik and Wolff, Dominik, Hedging European Government Bond Portfolios during the Recent Sovereign Debt Crisis (September 3, 2014). Journal of International Financial Markets, Institutions and Money, Forthcoming, Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2139305 or http://dx.doi.org/10.2139/ssrn.2139305

Wolfgang Bessler (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Dominik Wolff

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Technical University of Darmstadt

Hochschulstraße 1
S1|02 40
Darmstadt, Hessen D-64289
Germany

Frankfurt University of Applied Sciences ( email )

Nibelungenplatz 1
Frankfurt / Main, 60318
Germany

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