Enhancing the Toolbox of Fixed Income Active Portfolio Management

Procedia Economics and Finance 29 (2015) 96-121

26 Pages Posted: 21 May 2016 Last revised: 26 May 2016

Date Written: December 19, 2015

Abstract

Many central banks adopt an active investment style for reserve management. This paper discusses various possible enhancements to active management tools and processes to generate extra returns in an increasingly challenging environment. The proposed framework is based on an affine model, which includes macroeconomic and market sentiment indicators among the explanatory variables. Using estimates of expected excess returns drawn from the model, an operational indicator produces input highlighting the portfolio’s exposure to duration risk. This indicator is incorporated within a broader framework, in which a scorecard considers a range of qualitative elements, including consensus figures on macroeconomic data, monetary policy and interest rates. These elements are then combined with the model output to produce a comprehensive indication with respect to portfolio deviation from the benchmark. It should be noted that the approach presented in this paper is experimental; it has not yet been used in an active portfolio. Finally, consideration is given to the governance of the central bank investment process in order to assess how the proposed enhancements could strengthen the decision-making process. The analysis suggests that the scorecard with model-based input may address some weaknesses inherent in tactical decision-making.

Keywords: Fixed income risk premia; business cycle and investor sentiment; active portfolio management; risk-adjusted performance measurement

JEL Classification: G02; G11; G12

Suggested Citation

Violi, Roberto and Cellai, Gioia and Potente, Francesco and Puorro, Alfonso, Enhancing the Toolbox of Fixed Income Active Portfolio Management (December 19, 2015). Procedia Economics and Finance 29 (2015) 96-121, Available at SSRN: https://ssrn.com/abstract=2781913

Roberto Violi (Contact Author)

Bank of Italy ( email )

91 via Nazionale
Rome, rome 00184
Italy
+390647924108 (Phone)

Gioia Cellai

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Potente

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alfonso Puorro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
159
Abstract Views
874
Rank
334,740
PlumX Metrics