Riding the Yield Curve: Diversification of Strategies
AbstractRiding 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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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0410002.
Length: 77 pages
Date of creation: 04 Oct 2004
Date of revision:
Note: Type of Document - pdf; pages: 77
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Term Structure; Interest Rates; Market Efficiency; Taylor Rule;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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- Tao Wu, 2001. "Monetary policy and the slope factor in empirical term structure estimations," Working Paper Series 2002-07, Federal Reserve Bank of San Francisco.
- Taylor, Mark P, 1992.
"Modelling the Yield Curve,"
Royal Economic Society, vol. 102(412), pages 524-37, May.
- Lenz, Rainer, 2010.
"Analyse der Renditestrukturkurve: Zur Laufzeitenstruktur von Investitions- und Finanzierungsentscheidungen
[Yield curve analysis]," MPRA Paper 26621, University Library of Munich, Germany.
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