GDP-Linked Bonds as a New Asset Class

48 Pages Posted: 29 Nov 2021

See all articles by Nikolas Topaloglou

Nikolas Topaloglou

Athens University of Economics and Business

Ellie Papavassiliou

Athens University of Economics and Business - Department of International and European Economic Studies

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center; Cyprus Academy of Sciences, Letters, and Arts

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Abstract

We show that GDP-linked bonds can provide diversification benefits to investors. We use a stochastic spanning methodology which makes no assumptions on the distri- butional characteristics of the returns of these novel instruments and test both floaters and linkers. None of these types of GDP-linked bonds are spanned by a broad bench- mark set of stocks, bonds, and cash assets, thus providing a new asset class. Spanning is ruled out for a wide range of bond design parameters. Out-of-sample testing doc- uments economically and statistically significant diversification benefits for investors, with increase in Sharpe ratios 0.10-0.43 for floaters and 0.05-0.17 for linkers over the benchmark portfolio. The benefits depend on the risk premium for linkers, whereas floaters are less sensitive to the premium, but benefits persist for a wide range of premia estimated in existing literature and are robust to a randomized test. We also document the finance and macro factors that drive GDP-linked bonds performance, using generalised method of moments regressions.

Keywords: stochastic spanning, contingent debt, risk premium, diversification

Suggested Citation

Topaloglou, Nikolas and Papavassiliou, Ellie and Zenios, Stavros A., GDP-Linked Bonds as a New Asset Class. Available at SSRN: https://ssrn.com/abstract=3973802 or http://dx.doi.org/10.2139/ssrn.3973802

Nikolas Topaloglou (Contact Author)

Athens University of Economics and Business ( email )

76, Patision street
Athens, GR10434
Greece

Ellie Papavassiliou

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

28is Oktovriou 76
GR-10434 Athens
Greece

Stavros A. Zenios

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

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B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Cyprus Academy of Sciences, Letters, and Arts ( email )

Nicosia
Cyprus

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