Hedging European Government Bond Portfolios during the Recent Sovereign Debt Crisis


Empirical Capital Market Research, Risk & Optimization

Journal of International Financial Markets, Institutions and Money, Volume 33, November 2014, Pages 379–399


  • Bond portfolio management
  • Hedge ratio
  • Hedging effectiveness


Prof. Dr. Dominik Wolff Bessler, Dr. W.


The sovereign debt crisis challenged investors in European government bonds to deal with volatile interest rate spreads. For managing sovereign risk, “Eurex” introduced futures contracts on Italian government bonds reflecting risks of lower rated countries. We analyze hedging strategies for bond portfolios with futures on German and Italian government bonds before and during the sovereign debt crisis and evaluate their out-of-sample hedging effectiveness. Before the crisis, German futures were efficient instruments for hedging government bond portfolios, but during the crisis, a composite hedge combining German and Italian futures was superior. Allocating bonds to high and low sovereign risk-buckets and hedging these buckets individually further enhanced the hedging efficiency.

More information