Yield Curve Risk in Japanese Government Bond Markets

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1、InternationalReviewofFinance,1:2,2000:pp.97±121YieldCurveRiskinJapaneseGovernmentBondMarkets*KENNETHJ.SINGLETONGraduateSchoolofBusiness,StanfordUniversityABSTRACTThispapercharacterizesthenatureofyieldcurveriskintheJapanesegovernmentbond(JGB)market,andexplorestheeffectivenessofriskmanag

2、ementbasedonalinearfactorrepresentationofyieldcurverisk.Theimpliedoptimalhedgesagainstfactorriskarerelatedtoduration-basedhedgingstrategies,whichareshowninmanycasestobesub-stantiallysub-optimal.Inaddition,thedriftovertimeinoptimalhedgeratiosduetothelocalnatureofoptimalhedgingisinvestig

3、ated.TheresultsshowsubstantialdriftespeciallyfortheweightsonthefactorrepresentingtheriskofachangingslopeoftheJGByieldcurve.Thoughourfocusisongovernmentbondmarkets,thefindingshaveimplicationsforriskmanagementformostinterest-sensitiveinstruments,especiallythosethatarepricedrelativetogove

4、rnmentbonds(e.g.corporatebonds).I.INTRODUCTIONApproachestomanagingtheinterestrateriskofbondportfoliosordebtfinancingarenowwellintegratedintofinancialinstitutions'riskmanagementsystems.Typicallyinstitutionsachievefirst-orderhedgingofinterestratelevelriskusingtheconceptofdurationandthehy

5、potheticalexperimentofaparallelshiftintheyieldcurve.Dependingontheriskmanagementproblem,theymayhedgeagainstchangesintheshapesofyieldcurves(e.g.sloperisk)orhigherordereffectsoflevelchanges(e.g.convexityrisk).Themotivationforthesehedgesisoftenexperiential,orbasedsimplyonconvention,butisr

6、arelyconceptual.Forinstance,mosttermstructuretheoriesdonotimplylinearprice-yieldrelationsorthesingleparallelshiftriskfactorpresumedinduration-basedhedging.Theoryisalsosilentonthenatureandrelativeimportanceofcandidatesourcesofinterestrateriskinmulti-factormodels;whatworksinpracticedepen

7、dsontheprobabilitydistributionofyieldcurvechanges.InthispaperweinvestigatethenatureofyieldcurveriskinJapanesegovernmentbond(JGB)marketsandinquirewhetherimmunizationstrategieswidelyappliedintheUSmarketsarelikelytoworkequallywellinJapan.*IamgratefultoMichaelAsay,AymanHindy,TadashiKikug