Riding the Yield Curve: Diversification of Strategies

David Bieri and Ludwig B. Chincarini
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Ludwig B. Chincarini: Georgetown University

Finance from University Library of Munich, Germany

Abstract: Riding the yield curve, the fixed-income strategy of purchasing a longer-dated security and selling before maturity, has long been a popular means to achieve excess returns compared to buying-and-holding, despite its implicit violations of market efficiency and the pure expectations hypothesis of the term structure. This paper looks at the historic excess returns of different strategies across three countries and proposes several statistical and macro-based trading rules which seem to enhance returns even more. While riding based on the Taylor Rule works well even for longer investment horizons, our empirical results indicate that, using expectations implied by Fed funds futures, excess returns can only be increased over short horizons. Furthermore, we demonstrate that duration-neutral strategies are superior to standard riding on a risk- adjusted basis. Overall, our evidence stands in contrast to the pure expectations hypothesis and points to the existence of risk premia which may be exploited consistently.

Keywords: Term Structure; Interest Rates; Market Efficiency; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E43 G12 G14 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2004-10-04
New Economics Papers: this item is included in nep-rmg
Note: Type of Document - pdf; pages: 77
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410002

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