Publication Type

Conference Paper

Version

submittedVersion

Publication Date

8-2005

Abstract

A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading strategies exploit deviations in the level, slope and curvature of the yield curve from historical norms. We consider cash-neutral trades with one-month holding periods. Some mean-reverting strategies were found to be highly profitable, and outperform, on a risk-adjusted basis before transaction costs, alternative strategies of an investment in the Lehman Brothers Bond index (by up to 5.9 times) and an investment in the S&P index (by up to 5.1 times). Even after accounting for transaction costs, some of these strategies are still significantly more profitable than the benchmarks. Furthermore, transaction costs can be reduced substantially by changing the trading frequency or through structured derivative trades. We found evidence that market efficiency has improved, and the scope for excess returns has diminished since the late 1980s.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Financial Management Association European Conference, Siena, August 2005

First Page

1

Last Page

40

City or Country

Siena, Italy

Copyright Owner and License

Authors

Comments

Published in Journal of Fixed Income, 2006, 15 (4), 20-33. https://doi.org/10.3905/jfi.2006.627836

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