Term Structure Information and Bond Strategies

44 Pages Posted: 19 Aug 2012

See all articles by Maria Gonzalez

Maria Gonzalez

University of Castilla-La Mancha

Frank S. Skinner

Brunel University

Sam Agyei-Ampomah

Cranfield University - School of Management

Date Written: May 19, 2012

Abstract

We examine term structure theories by using a novel approach. We form bond investment strategies based on different theories of the term structure in order to determine which strategy performs best. When using a manipulation-proof performance measure, we find that consistent with prior literature, an active strategy that is based on time varying term premiums can indeed form the basis of a successful bond strategy that outperforms an unbiased expectation inspired passive bond buy and hold strategy. This is true, however, for an earlier time period when the literature first made this claim. In a later time period, we find that the passive buy and hold strategy is significantly superior to all active strategies.

This result is confirmed by statistical tests and it suggests that once it became known that an active strategy based on time varying term premiums could outperform a passive buy and hold strategy, the markets adjusted and arbitraged away this opportunity. Overall, it appears that the unbiased expectation hypothesis is the most likely explanation of the behaviour of the term structure during more recent times. This is because economically and statistically significant superior performance cannot be achieved if one uses information from the forward curve or the term structure as a guide to adjusting bond portfolios in response to changes in the term premium.

Keywords: Term structure theory, Bond strategies, MPPM, Performance measurement, Simulation

JEL Classification: C61, E43, G11, G12

Suggested Citation

Gonzalez, Maria and Skinner, Frank S. and Agyei-Ampomah, Sam, Term Structure Information and Bond Strategies (May 19, 2012). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2132038

Maria Gonzalez

University of Castilla-La Mancha ( email )

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

Frank S. Skinner (Contact Author)

Brunel University ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Sam Agyei-Ampomah

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom
+441234754375 (Phone)

HOME PAGE: http://www.som.cranfield.ac.uk/som/p19638/People/Faculty/Academic-Faculty-Listing-A-Z/Dr-Sam-Agyei-A

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