Bond Laddering and Bond Indexing: An Empirical Comparison

33 Pages Posted: 3 Nov 2016

See all articles by C. Sherman Cheung

C. Sherman Cheung

McMaster University

Peter Miu

McMaster University - DeGroote School of Business

Date Written: November 2, 2016

Abstract

Bond laddering and bond indexing have been widely accepted approaches to bond investing among retail investors. However, bond laddering has virtually been ignored in both the academic literature and most of the popular investment textbooks. One thing both approaches have in common is that they are passive strategies with no attempt whatsoever to beat the market. There are many unresolved issues about the two seemingly similar approaches. First, which approach should an investor favor? Is there any room for both to be used at the same time? Second, if an investor decides to use ladder, what is the appropriate term to maturity for the ladder? There is hardly any theoretical or empirical guidance as to which is a better approach to use and the right term of a ladder. The relative attractiveness of the above two approaches are empirically examined in this study. We identify conditions that favor one over the other. Conditions under which both instruments should be held within an optimal portfolio are also identified. We also identify conditions in which a longer term ladder is more appropriate than a shorter term ladder.

Keywords: ladder bond portfolio, passive bond investments

JEL Classification: G10, G11

Suggested Citation

Cheung, C. Sherman and Miu, Peter, Bond Laddering and Bond Indexing: An Empirical Comparison (November 2, 2016). Available at SSRN: https://ssrn.com/abstract=2863139 or http://dx.doi.org/10.2139/ssrn.2863139

C. Sherman Cheung

McMaster University ( email )

School of Business
1280 Main Street W
Hamitlon, Ontario L8S 4M4
Canada

Peter Miu (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext 23981 (Phone)

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