The Impact of Different Bond Types on Mean-Reversion Strategies for Bond Portfolio Management

Yuning Zhang ()
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Yuning Zhang: University of Edinburgh, School of Mathematics

A chapter in Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023), 2024, pp 138-150 from Springer

Abstract: Abstract The research aims to investigate the mean-reversion strategy for three types of bonds: government bonds, corporate bonds, and municipal bonds. The analysis is based on 10 different bonds for each type. The descriptive statistical analysis includes computing the mean, standard deviation, skewness, kurtosis, and Sharpe ratio of the portfolio returns. Moreover, the inferential statistical analysis involves computing the high-water mark, drawdown, and maximum drawdown of the portfolio returns. The results indicate that the traditional mean-reversion strategy is more effective for government bonds than corporate and municipal bonds. Furthermore, the strategy has a negative Sharpe ratio, suggesting that the risk-adjusted returns are not favorable. The high drawdown and maximum drawdown suggest that the strategy can result in significant losses for investors. Therefore, investors should exercise caution when using the traditional mean-reversion strategy for bonds.

Keywords: Mean-reversion Strategy; Bonds; Sharpe Ratio (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-246-0_16

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DOI: 10.2991/978-94-6463-246-0_16

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