Are Multiple Hedging Instruments Better than One?

Abstract

The authors examine the effectiveness of the ten–year, the five–year, and the two–year treasury note futures contracts in hedging the price risk of fixed–rate mortgage–backed securities. The ten–year treasury note futures contract offers superior hedging opportunities across all six coupon MBS examined. Using multiple instruments simultaneously results in minor improvements with–in sample. In out of–sample experiments, however, the use of a single instrument provides better hedging performance than the use of multiple instruments.