Template-type: ReDIF-Paper 1.0
Author-Name: Leo Krippner
Author-Email: leo.krippner@ampcapital.com
Author-Workplace-Name: AMP Capital Investors
Title: Attributing Returns and Optimising United States
Swaps Portfolios Using an Intertemporally-Consistent
and Arbitrage-Free Model of the Yield Curve
Abstract: This paper uses the volatility-adjusted orthonormalised
Laguerre polynomial model of the yield curve (the VAO model)
from Krippner (2005), an intertemporally-consistent and
arbitrage-free version of the popular Nelson and Siegel (1987)
model, to develop a multi-dimensional yield-curve-based risk
framework for fixed interest portfolios. The VAO model is also
used to identify relative value (i.e. potential excess returns)
from the universe of securities that define the yield curve.
In combination, these risk and return elements provide an
intuitive framework for attributing portfolio returns ex-post,
and for optimising portfolios ex-ante. The empirical applications
are to six years of daily United States interest rate swap data.
The first application shows that the main sources of fixed
interest portfolio risk (i.e. unanticipated variability in
ex-post returns) are first-order (‘duration’) effects from
stochastic shifts in the level and shape of the yield curve;
second-order (‘convexity’) effects and other contributions are
immaterial. The second application shows that fixed interest
portfolios optimised ex-ante using the VAO model risk/relative
framework significantly outperform a naive evenly-weighted
benchmark over time.
Classification-JEL: E43; G11; G12
Keywords: yield curve; term structure; fixed interest securities;
portfolio optimisation; interest rate swaps
Length: 39 pages
Creation-Date: 2005-03-11
File-URL: https://repec.its.waikato.ac.nz/wai/econwp/0503.pdf
File-Format: Application/pdf
Handle: RePEc:wai:econwp:05/03