Chapter 7 Conclusion

In this project, spot rates from the Federal Reserve were analyzed along with their corresponding zero prices and returns over time. In addition, multiple hedging models were implemented and analyzed. The simple regression hedging model outperformed the two duration models, and was on par with the much more complicated multiplicative regression model. This leads me to conclude that the simple regression model is the most useful out of the four.

I was particularly impressed with how well the yield curve factors explained the variation in the rates for other maturities. Using linear combinations of certain maturity spot rates seems to create powerful explanatory variables for other maturities.

Further research could be done by including transactions costs in hedging performance calculations. This would likely penalize the multiplicative regression even further. Additionally, one could include thresholds that had to be hit before a certain recommended change in the weights was actually made. This could combat the transaction costs and would benefit the simple regression method along with the duration methods.