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The Pros and Cons of Butterfly Barbells

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Author Info
Christensen, Michael () (Department of Finance, Aarhus School of Business)
Abstract

During recent years butterfly barbells have been used actively as investment strategies. Such barbells are

constructed in order to obtain a yield pick-up and at the same time to be risk neutral against a change in

the slope of the yield curve and/or a parallel shift in the yield curve. However, empirically the yield curve

may change in an unanticipated way, which can have drastic consequences for the outcome of the

strategy. This paper addresses some of the various risk factors characterizing butterfly barbells, and it is

shown that a potential yield pick-up is not the result of an arbitrage possibility, but rather it reflects the

actual shape of the yield curve. Furthermore, in a dynamic setting we show that the yield pick-up gives

false information about the holding period returns, which the investor can expect to obtain.

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Publisher Info
Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-20.

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Length: 22 pages
Date of creation: 09 May 2002
Date of revision:
Handle: RePEc:hhb:aarfin:2002_020

Contact details of provider:
Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research
Keywords: Finance; Bonds; Portfolio; Risk diversitification;

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October. [Downloadable!] (restricted)
  2. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
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