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makn
Topic Author
Posts: 8
Joined: July 14th, 2002, 3:00 am

Hedging TIPS

August 12th, 2004, 2:57 am

Dear experts, I have recently read some articles about treasury inflation protected securities - TIPS . I have realised that there is no proper way to hedge a TIPS portfolio. So, is it possible to hedge TIPS using nominal interest rate derivatives, such as 10 Years Treasuy or a combination of them ? Thanks Student
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

Hedging TIPS

August 12th, 2004, 6:26 am

It is difficult to find the right hedge ratio, because TIPS correlation to nominal bonds changes over time. Currently these so called betas are very high (close to .8) whereas a few years ago they were at 0.3. Use a 30-90 day rolling time window to measure beta between tips and nominals, this usually works out ok. Do check the error of estimation regularly...because when the market changes its view on the beta, the correlation jumps quickly and abruptly to a new level.
 
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marajesh
Posts: 15
Joined: July 14th, 2002, 3:00 am

Hedging TIPS

August 12th, 2004, 11:33 am

I have heard people mention the seasonality of the betas used to hedge tips (apparently because of the non seasonally adjusted index used for calculating inflation accretion). Does anyone have any information on this?ThanksRajesh
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