Pricing and constructing international government bond portfolios

Otto Randl, Giorgia Simion and Josef Zechner

Journal of Financial Economics, 2025, vol. 173, issue C

Abstract: This paper derives a stochastic discount factor for currency-hedged government bonds of developed markets by projecting returns onto the unconditional mean–variance efficient (UMVE) portfolio. Priced risks of international bonds differ fundamentally from those of currencies. The UMVE portfolio achieves a Sharpe ratio over twice the average of individual markets, with the market price of risk peaking during crises and periods with high inflation dispersion. While bond returns exhibit a strong factor structure, common sources of variation are only weakly connected to priced risks. Hedging unpriced risks in naive or factor-based strategies significantly improves Sharpe ratios, even under portfolio weight constraints.

Keywords: International government bond portfolios; Bond risk premia; Stochastic discount factor (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:173:y:2025:i:c:s0304405x25001606

DOI: 10.1016/j.jfineco.2025.104152

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