Analyzing Hedging Strategies for Fixed Income Portfolios: A Bayesian Approach for Model Selection

Subsequent to the introduction of the Euro in 1999, government bond yields of countries within the European monetary union (EMU) converged. Consequently, EMU government bond yields basically co-moved, resulting in relatively stable yield spreads (Figure 1), revealing little differences in sovereign risk at least before the beginning of the financial crisis in 2008. Consequently, there was a high level of substitutability in a sense that futures contracts on bonds of one country could be used

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