Riding the Yield Curve: A Spanning Analysis

32 Pages Posted: 22 Aug 2010 Last revised: 8 Jan 2012

See all articles by Valentina Galvani

Valentina Galvani

University of Alberta - Department of Economics

Stuart Landon

University of Alberta - Department of Economics

Date Written: July 2, 2010

Abstract

The average return on long-term bonds exceeds the return on short-term bills by a large amount over short investment horizons. A riding-the-yield-curve investment strategy takes advantage of the higher returns on longer term bonds. This strategy involves the purchase of bonds with maturities longer than the investment horizon and the sale of these bonds, before they mature, at the end of the investment horizon. Most of the literature that evaluates this strategy compares only ex post average returns or Sharpe ratios. In this paper, we use spanning tests to provide formal statistical evidence on the benefits of investing in long bonds when the investment horizon is short. The results for both the US and Canada indicate that an investor with a short horizon is better off investing in short-term debt instruments than long-term bonds.

Keywords: Yield curve, Spanning, Mean Variance, Portfolio Allocation

Suggested Citation

Galvani, Valentina and Landon, Stuart, Riding the Yield Curve: A Spanning Analysis (July 2, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1662022 or http://dx.doi.org/10.2139/ssrn.1662022

Valentina Galvani (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Stuart Landon

University of Alberta - Department of Economics ( email )

Tory 8-14
Edmonton T6G 2H4, Alberta T6G 2H4
Canada

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