A Comparison of Municipal Bond Index Weighting Schemes

Posted: 24 Mar 2015

See all articles by Vineer Bhansali

Vineer Bhansali

LongTail Alpha, LLC

Ethan Namvar

University of California, Berkeley - Haas School of Business; Columbia Business School

Kuntara Pukthuanthong

University of Missouri, Columbia

Shane D. Shepherd

Research Affiliates, LLC

Date Written: January 1, 2010

Abstract

Valuation-indifferent weighting has gained significant interest as a strategy for creating alternative indexes. The weighting scheme has empirical support for equities, investment-grade, high-yield, and emerging market bonds. Portfolio weights formed based on prices or market capitalizations tend to be positively correlated with pricing errors. In contrast, valuation-indifferent weighting or fundamental weighting schemes do not exhibit this positive correlation between portfolio weights and pricing errors. As a result, a price-weighted portfolio would have greater portfolio weights committed to overvalued equities versus a non-price-weighted portfolio, which results in sub-optimal performance. In this study, we apply the same concept of a valuation-indifferent weighting to municipal bonds and show that it outperforms traditional weighted benchmarks. The degree of outperformance is higher during bear markets, high volatility, and falling interest rate periods. Alphas from three to five factors bond pricing model of the returns of fundamental index muni remain significant.

Keywords: Municipal Bonds; Municipal Bond Index; Passive Investing; Indexing

JEL Classification: G11, H70

Suggested Citation

Bhansali, Vineer and Namvar, Ethan and Pukthuanthong, Kuntara and Shepherd, Shane D., A Comparison of Municipal Bond Index Weighting Schemes (January 1, 2010). Available at SSRN: https://ssrn.com/abstract=2584291 or http://dx.doi.org/10.2139/ssrn.2584291

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Ethan Namvar (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7989 (Phone)

HOME PAGE: http://haas.berkeley.edu

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Shane D. Shepherd

Research Affiliates, LLC ( email )

620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States

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