LO 10.3: Calculate the regression hedge adjustment factor, beta.

LO 10.3: Calculate the regression hedge adjustment factor, beta.
In order to profit from a hedge, we must assume variability in the spread between the real and nominal yields over time. As mentioned, least squares regression is conducted to analyze these changes. The alpha and beta coefficients of a least squares regression line will be determined by the line of best fit through historical yield data points.
where: AytN = changes in the nominal yield AytR = changes in the real yield
Recall that alpha represents the intercept term and beta represents the slope of the data plot. If least squares estimation determines the yield beta to be 1.0198, then this means that over the sample period, the nominal yield increases by 1.0198 basis points for every basis point increase in real yields.

Write a Comment