Profiting from Mean-Reverting Yield Curve Trading Strategies
A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading strat...
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sg-smu-ink.lkcsb_research-34882019-09-06T05:38:25Z Profiting from Mean-Reverting Yield Curve Trading Strategies CHUA, Choong Tze KOH, Winston T. H. Ramaswamy, Krishna A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading strategies exploit deviations in the level, slope and curvature of the yield curve from historical norms. We consider cash-neutral trades with one-month holding periods. Some mean-reverting strategies were found to be highly profitable, and outperform, on a risk-adjusted basis before transaction costs, alternative strategies of an investment in the Lehman Brothers Bond index (by up to 5.9 times) and an investment in the S&P index (by up to 5.1 times). Even after accounting for transaction costs, some of these strategies are still significantly more profitable than the benchmarks. Furthermore, transaction costs can be reduced substantially by changing the trading frequency or through structured derivative trades. We found evidence that market efficiency has improved, and the scope for excess returns has diminished since the late 1980s. 2005-08-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/2489 https://ink.library.smu.edu.sg/context/lkcsb_research/article/3488/viewcontent/ChuaKokESAM04_142.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Finance and Financial Management Portfolio and Security Analysis |
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Finance and Financial Management Portfolio and Security Analysis CHUA, Choong Tze KOH, Winston T. H. Ramaswamy, Krishna Profiting from Mean-Reverting Yield Curve Trading Strategies |
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A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading strategies exploit deviations in the level, slope and curvature of the yield curve from historical norms. We consider cash-neutral trades with one-month holding periods. Some mean-reverting strategies were found to be highly profitable, and outperform, on a risk-adjusted basis before transaction costs, alternative strategies of an investment in the Lehman Brothers Bond index (by up to 5.9 times) and an investment in the S&P index (by up to 5.1 times). Even after accounting for transaction costs, some of these strategies are still significantly more profitable than the benchmarks. Furthermore, transaction costs can be reduced substantially by changing the trading frequency or through structured derivative trades. We found evidence that market efficiency has improved, and the scope for excess returns has diminished since the late 1980s. |
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CHUA, Choong Tze KOH, Winston T. H. Ramaswamy, Krishna |
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CHUA, Choong Tze KOH, Winston T. H. Ramaswamy, Krishna |
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CHUA, Choong Tze |
title |
Profiting from Mean-Reverting Yield Curve Trading Strategies |
title_short |
Profiting from Mean-Reverting Yield Curve Trading Strategies |
title_full |
Profiting from Mean-Reverting Yield Curve Trading Strategies |
title_fullStr |
Profiting from Mean-Reverting Yield Curve Trading Strategies |
title_full_unstemmed |
Profiting from Mean-Reverting Yield Curve Trading Strategies |
title_sort |
profiting from mean-reverting yield curve trading strategies |
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Institutional Knowledge at Singapore Management University |
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2005 |
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https://ink.library.smu.edu.sg/lkcsb_research/2489 https://ink.library.smu.edu.sg/context/lkcsb_research/article/3488/viewcontent/ChuaKokESAM04_142.pdf |
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