NDLI: Term structure information and bond strategies

Content Provider	Springer Nature Link
Author	O González, María Skinner, Frank S. Agyei Ampomah, Samuel
Copyright Year	2012
Abstract	We examine term structure theories by using a novel approach. We form bond investment strategies based on different theories of the term structure in order to determine which strategy performs best. When using a manipulation-proof performance measure, we find that consistent with prior literature, an active strategy that is based on time varying term premiums can indeed form the basis of a successful bond strategy that outperforms an unbiased expectation inspired passive bond buy and hold strategy. This is true, however, for an earlier time period when the literature first made this claim. In a later time period, we find that the passive buy and hold strategy is significantly superior to all active strategies. This result is confirmed by statistical tests and it suggests that once it became known that an active strategy based on time varying term premiums could outperform a passive buy and hold strategy, the markets adjusted and arbitraged away this opportunity. Overall, it appears that the unbiased expectation hypothesis is the most likely explanation of the behaviour of the term structure during more recent times. This is because economically and statistically significant superior performance cannot be achieved if one uses information from the forward curve or the term structure as a guide to adjusting bond portfolios in response to changes in the term premium.
Starting Page	53
Ending Page	74
Page Count	22
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	41
Issue Number	1
e-ISSN	15737179
Language	English
Publisher	Springer US
Publisher Date	2012-07-06
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Term structure theory Bond strategies MPPM Performance measurement Simulation Finance/Investment/Banking Accounting/Auditing Econometrics Operations Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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