Hedging GNMA Mortgage-Backed Securities with T-Note Futures: Dynamic versus Static Hedging

This article proposes a dynamic hedging model for Government National Association Mortgage-Backed Securities (GNMA MBSs) that is free of the drawbacks associated with the static hedging strategies currently used. The simultaneity bias of the regression approach is dealt with by modeling the joint distribution of price changes of GNMA MBSs and 10-year Treasury-note futures. Error correction (EC) terms from cointegrating relationships are included in the conditional mean equations to preserve the long-term equilibrium relationship of the two markets. The time-varying variance-covariance structure of the two markets is modeled via a version of the bivariate generalized autoregressive conditionally heteroskedastic model (bivariate GARCH), which assures that the time-varying variance-covariance matrix is positive semidefinite for all time periods. This dynamic error-correction GARCH model is estimated using daily data on six different coupon GNMA MBSs. Dynamic cross-hedge ratios are obtained from the time-varying variance-covariance matrix using the 10-year Treasury-note futures contract as the hedging instrument. These ratios are evaluated in terms of both overall risk reduction and expected utility maximization. There is overwhelming evidence that dynamic hedge ratios are superior to static ones even when transaction costs are incorporated into the analysis. This conclusion holds for all six different coupon GNMA MBSs under investigation. Copyright American Real Estate and Urban Economics Association.

Biodiversity, Biological Uncertainty, and Setting Conservation Priorities

In a world of massive extinctions where not all taxa can be saved, how ought biologists to decide their preservation priorities? When biologists make recommendations regarding conservation, should their analyses be based on scientific criteria, on public or lay criteria, on economic or some other criteria? As a first step in answering this question, we examine the issue of whether biologists ought to try to save the endangered Florida panther, a well known “glamour” taxon. To evaluate the merits of panther preservation, we examine three important arguments of biologists who are skeptical about the desirability of panther preservation. These arguments are (1) that conservation dollars ought to be spent in more efficient ways than panther preservation; (2) that biologists and conservationists ought to work to preserve species before subspecies; and (3) that biologists and conservationists ought to work to save habitats before species or subspecies. We conclude that, although all three arguments are persuasive, none of them provides convincing grounds for foregoing panther preservation in favor of other, more scientifically significant conservation efforts. Our conclusion is based, in part, on the argument that biologists ought to employ ethical, as well as scientific, rationality in setting conservation priorities and that ethical rationality may provide persuasive grounds for preserving taxa that often are not viewed by biologists as of great importance