Riding the Yield Curve: A Spanning Analysis

Valentina Galvani and Stuart Landon ()

No 2011-19, Working Papers from University of Alberta, Department of Economics

Abstract: The average return on long-term bonds exceeds the return on short-term bills by a large amount over short investment horizons. A riding-the-yield-curve investment strategy takes advantage of the higher returns on longer term bonds. This strategy involves the purchase of bonds with maturities longer than the investment horizon and the sale of these bonds, before they mature, at the end of the investment horizon. Most of the literature that evaluates this strategy compares only ex post average returns or Sharpe ratios. In this paper, we use spanning tests to provide formal statistical evidence on the benefits of investing in long bonds when the investment horizon is short. The results for both the US and Canada indicate that an investor with a short horizon is better off investing in short-term debt instruments than long-term bonds.

Keywords: North American bond market; portfolio diversification; mean-variance spanning; yield curve (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-11-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (1)

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Journal Article: Riding the yield curve: a spanning analysis (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2011_019

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