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
Date Written: February 23, 2010
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
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