The interest rate sensitivity of Luxembourg bond funds: results from a time-varying model

Raphaël Janssen and Romuald Morhs (romuald.morhs@bcl.lu)

No 98, BCL working papers from Central Bank of Luxembourg

Abstract: The primary aim of this work is to study the sensitivity of Luxembourg bond funds to interest rate movements. For this purpose, the dataset compiled at the Banque centrale du Luxembourg (BCL) since December 2008 is used to analyse the balance sheet composition of Luxembourg bond funds and to measure the interest rate exposure of their bond portfolio. An econometric model with time-varying parameters is then estimated on monthly data over the sample 2008:1-2014:6 to analyse the evolution of the interest rate sensitivity of the Net Asset Value (NAV) of Luxembourg bond funds. The main findings of the study are the following. At the end of the period under review, Luxembourg bond funds have lengthened the residual maturity and the duration of their portfolio, which have returned to a similar level as the one observed in December 2008. This evolution, which points toward a search-for-yield behaviour in a low interest rate environment, suggests that Luxembourg bond funds have recently become more sensitive to fixedincome market developments. According to the level of the parameter estimate obtained with the Kalman filter at the end of the sample, a 100 basis points rise in long term interest rates on the sovereign bond markets associated with an additional 100 basis points rise in the risk premium on the high-yield bond markets would materialise approximately into a 10% decrease in the NAV of Luxembourg bond funds.

Keywords: Bond funds; risk analysis; security-by-security reporting; Kalman filter (search for similar items in EconPapers)
JEL-codes: C32 C81 F30 G11 G23 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-08
New Economics Papers: this item is included in nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp098

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