Optimal Monetary and Fiscal Policies to Maximise Non-Parallel Risk Premia in Sovereign Bond Markets

Sanveer Hariparsad () and Eben Maré ()
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Sanveer Hariparsad: Department of Actuarial Science, Faculty of Natural and Agricultural Sciences, University of Pretoria, Pretoria 0002, South Africa
Eben Maré: Department of Mathematics and Applied Mathematics, Faculty of Natural and Agricultural Sciences, University of Pretoria, Pretoria 0002, South Africa

JRFM, 2024, vol. 17, issue 11, 1-33

Abstract: In this paper, we analysed several emerging market (EM) and developed market (DM) sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We found that non-parallel shifts are more prevalent in EM due to higher political and economic risks. Key drivers include systemic risk events like wars, debt distress, and pandemics. By backtesting a long butterfly strategy to extract non-parallel risk premia from June 2007 to March 2024, we observed that steeper slopes and greater curvature result in higher returns. We also quantified monetary and fiscal regimes to determine what types of policies are required to extract non-parallel risk premia from these sovereign yield curves. Our research suggests that countries with opposing monetary and fiscal policies possess higher return opportunities whilst countries with complementing policies require tactical butterfly strategies to optimise returns.

Keywords: butterfly strategies; fixed income risk premia; monetary and fiscal policy; slope; curvature (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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