A Performance Attribution Methodology for Fixed Income Portfolios

PORTFOLIO AND RISK MANAGEMENT FOR CENTRAL BANKS AND SOVEREIGN WEALTH FUNDS, Ken Nyholm, Joachim Coche, and Gabriel Petre, eds.

16 Pages Posted: 21 Dec 2009 Last revised: 24 Mar 2011

Antonio F. A. Silva Jr. Jr.

Government of the Federative Republic of Brazil - Central Bank of Brazil

Pablo Jose Campos de Carvalho

Government of the Federative Republic of Brazil - Central Bank of Brazil; Rensselaer Polytechnic Institute (RPI) - Accounting, Finance and Economics

Jose Renato Haas Ornelas

Banco Central do Brasil

Date Written: February 23, 2010

Abstract

This paper presents a performance attribution methodology for fixed income portfolios. The methodology is relatively simple and despite its simplicity it is adequate to many Central Banks investment processes. Our approach combines elements from existing methodologies, such as the duration-based, with new insights in the asset selection factor. The methodology departs from a yield curve fitting on government bonds and three hypothetical portfolios are built in order to attribute returns to factors. Our approach does not require a specific yield curve fitting methodology. The fitted yield curve is used to attribute the selection and liquidity factor. Thus, our selection and liquidity factor is calculated explicitly and do not appear in the residuals as in most attribution models. The credit factor is attributed for each bond individually, abstracting from complex movements of the spread curve. This procedure is not based on unclear and arbitrary yield curve dynamics as principal component analysis that is used by many performance attribution models. We present some examples of attribution using the methodology, and results were consistent with management strategies and the yield curve movement. Even when we combine several strategies the model was able to identify the actual sources of the differential return.

Keywords: Performance, Attributtion, Fixed Income, Central Bank

Suggested Citation

Silva Jr., Antonio F. A. and de Carvalho, Pablo Jose Campos and Ornelas, Jose Renato Haas, A Performance Attribution Methodology for Fixed Income Portfolios (February 23, 2010). PORTFOLIO AND RISK MANAGEMENT FOR CENTRAL BANKS AND SOVEREIGN WEALTH FUNDS, Ken Nyholm, Joachim Coche, and Gabriel Petre, eds.. Available at SSRN: https://ssrn.com/abstract=1525448

Antonio F. A. Silva Jr. Jr.

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pablo Jose Campos De Carvalho

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Rensselaer Polytechnic Institute (RPI) - Accounting, Finance and Economics ( email )

United States

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

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