Pricing and Constructing International Government Bond Portfolios

56 Pages Posted: 30 Jan 2022 Last revised: 12 May 2022

See all articles by Otto Randl

Otto Randl

Vienna University of Economics and Business

Giorgia Simion

Vienna University of Economics and Business

Josef Zechner

Vienna University of Economics and Business

Date Written: May 12, 2022

Abstract

This paper documents that even naïve cross-market diversification strategies lead to substantial improvements of risk-return relations of government bond portfolios. Motivated by this finding, we derive a global stochastic discount factor, which prices excess returns of individual bond markets and international bond portfolio strategies. The SDF is supported by standard validation tests, but the fraction of unpriced components of bond returns is high, at around 50%. Hedging internationally diversified bond portfolios against these unpriced risks improves portfolio performance substantially. The performance improvements are robust, even when conservative bounds on individual market weights are imposed. We find that the SDF cannot be explained by the principal components derived from bond returns.

Keywords: international government bonds, bond risk premiums, stochastic discount factor, factor models.

JEL Classification: G11, G12, G15.

Suggested Citation

Randl, Otto and Simion, Giorgia and Zechner, Josef, Pricing and Constructing International Government Bond Portfolios (May 12, 2022). Available at SSRN: https://ssrn.com/abstract=4021429 or http://dx.doi.org/10.2139/ssrn.4021429

Otto Randl (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Giorgia Simion

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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