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Hedging bond portfolios against infinitely many ranked factors of risk
Esperanza H. Montagut and María José Pérez-Fructuoso |
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The paper considers bond portfolios affected by both interest rate and default-risk. In
order to guarantee a correct performance of our analysis, we will hedge against an infinite number
of factors. Hence, we do not have to impose and do not depend on any assumption concerning the
dynamic behavior of the term structure of interest rates. On the other hand, since a complete hedging
is not feasible unless some ideal situations hold, we rank the factors according to the empirical
evidence. Thus, we make the most important risks vanish, and minimize the effect of those kinds
of risk less usual in practice.
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