Dynamic Risk-Aware Yield Search: A Useful Tool for Fixed Income Investors

18 Pages Posted: 12 Feb 2019 Last revised: 15 Feb 2019

Date Written: January 31, 2019

Abstract

Fixed income investors favor higher yields with lower risk. Our objective in this paper is to outline an active fixed income strategy that maximizes yield and is protected against major risk factors affecting fixed income securities. In particular, we look at interest rate risk, credit risk, inflation risk, price volatility, and liquidity risk as different risk factors and are able to tactically change our allocations in favor of a higher yielding fixed income portfolio compared to the benchmark allocation - Barclays US Aggregate Bond Index. In the current low yield environment with flattening yield curves, we find that the strategy favors allocation to the short end of the interest rate curve and inflation-protected securities and the strategy is able to seamlessly incorporate investor views across different risk factors. The strategy returns a portfolio that only takes those risks for which it is appropriately compensated through higher yields. The methodology discussed is quite flexible and can accommodate multiple investor preferences with respect to different risk factors. The strategy is expressed via ETFs to reduce liquidity risk and to contain execution costs.

Keywords: Asset Allocation, Fixed Income, Government Bonds, Corporate Bonds, Inflation, Risk Management, Fixed Income Portfolio Management

JEL Classification: C00, C10, C50, G00, G11, G12

Suggested Citation

Chakravorty, Gaurav and Awasthi, Ankit and Singhal, Mansi, Dynamic Risk-Aware Yield Search: A Useful Tool for Fixed Income Investors (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=3326444 or http://dx.doi.org/10.2139/ssrn.3326444

Gaurav Chakravorty (Contact Author)

Qplum ( email )

Harborside 5, 185 Hudson St, Suite 1620
Jersey City, NJ 07311
United States
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HOME PAGE: http://https://www.qplum.co

Ankit Awasthi

affiliation not provided to SSRN

Mansi Singhal

Qplum ( email )

Harborside 5, 185 Hudson St, Suite 1620
Jersey City, NJ 07311
United States
2013772302 (Phone)

HOME PAGE: http://www.qplum.co

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