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Decomposition of the realized rate of return on investment in fixed-income securities

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  • Rumiana Górska

    (Warsaw School of Economics)

Abstract

Paper presents decomposition of the realized rate of return on investment in fixed-income securities in order to identify the income/risk sources. The decomposition is accomplished applying the concept of factorization and factor analysis on treasury bonds returns. Weekly data from the interbank market in Poland for the period 30 June – 6 October, 2004 (14 weeks) are used. In the single-factor model of decomposition, the source of risk is assumed to be the change of yield-to-maturity (YTM) of the considered bond. Within the multi-factor model, decomposition is carried out by means of both the factorization concept and factor analysis. Factor analysis is undertaken as a preliminary action aimed to identify common factors of market risk that affect the realized rate of return of the examined securities. The results of factor analysis are used in the multi-factor model of decomposition. This approach allows to reduce the number of market risk factors and to investigate their influence on realized rate of returns on different fixed-income securities.

Suggested Citation

  • Rumiana Górska, 2007. "Decomposition of the realized rate of return on investment in fixed-income securities," Working Papers 3, Department of Applied Econometrics, Warsaw School of Economics.
    • Handle: RePEc:wse:wpaper:3
    as

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    File URL: http://kolegia.sgh.waw.pl/pl/KAE/struktura/IE/struktura/ZES/Documents/Working_Papers/aewp03-07.pdf
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    References listed on IDEAS

    as
    1. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, March.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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