Riding the yield curve, the fixed-income strategy of purchasing a longer-dated security and selling before maturity, has long been a popular means to achieve excess returns compared to buying-and-holding, despite its implicit violations of market efficiency and the pure expectations hypothesis of the term structure. This paper looks at the historic excess returns of different strategies across three countries and proposes several statistical and macro-based trading rules which seem to enhance returns even more. While riding based on the Taylor Rule works well even for longer investment horizons, our empirical results indicate that, using expectations implied by Fed funds futures, excess returns can only be increased over short horizons. Furthermore, we demonstrate that duration-neutral strategies are superior to standard riding on a risk- adjusted basis. Overall, our evidence stands in contrast to the pure expectations hypothesis and points to the existence of risk premia which may be exploited consistently.
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Paper provided by EconWPA in its series Finance with number
0410002.
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.:
Taylor, Mark P, 1992.
"Modelling the Yield Curve,"
Economic Journal,
Royal Economic Society, vol. 102(412), pages 524-37, May.
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