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Factor-based tactical bond allocation and interest rate risk management


Thomann, Andreas (2019). Factor-based tactical bond allocation and interest rate risk management. Journal of Investment Strategies, 8(3):49-79.

Abstract

This paper offers two composite bond market factor investment strategies each for the Swiss bond market and for the global sovereign bond market. These composite factor strategies can be useful tools when making tactical asset allocation decisions between bonds and cash, and they can act as a base for the duration debate. As such, the output of our bond market factors can guide tactical interest rate views and therefore interest rate risk management. To construct these composite factors, we use four economically meaningful individual factors. Following an investment strategy based on a composite bond market factor, constructed as the equally weighted average of individual components, we are able to outperform cash as well as the staticbuy-and-hold strategy with regard to the Sharpe ratio, annualized standard deviation and maximum drawdown. Testing the composite and individual factors on their performance during periods of historical rising interest rates, we observe improved drawdown results compared with holding the underlying asset passively.

Abstract

This paper offers two composite bond market factor investment strategies each for the Swiss bond market and for the global sovereign bond market. These composite factor strategies can be useful tools when making tactical asset allocation decisions between bonds and cash, and they can act as a base for the duration debate. As such, the output of our bond market factors can guide tactical interest rate views and therefore interest rate risk management. To construct these composite factors, we use four economically meaningful individual factors. Following an investment strategy based on a composite bond market factor, constructed as the equally weighted average of individual components, we are able to outperform cash as well as the staticbuy-and-hold strategy with regard to the Sharpe ratio, annualized standard deviation and maximum drawdown. Testing the composite and individual factors on their performance during periods of historical rising interest rates, we observe improved drawdown results compared with holding the underlying asset passively.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > General Economics, Econometrics and Finance
Social Sciences & Humanities > Strategy and Management
Language:English
Date:9 August 2019
Deposited On:05 Feb 2020 07:54
Last Modified:09 Aug 2020 00:00
Publisher:Incisive Media Ltd.
ISSN:2047-1238
OA Status:Green
Publisher DOI:https://doi.org/10.21314/JOIS.2019.112
Other Identification Number:merlin-id:19036

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