Dts (Duration Times Spread)

48 Pages Posted: 14 Jan 2007

See all articles by Arik Ben Dor

Arik Ben Dor

Lehman Brothers, New York - Fixed Income Research

Lev Dynkin

Lehman Brothers

Jay Hyman

Lehman Brothers

Patrick Houweling

Robeco Investment Research

Erik van Leeuwen

Robeco Asset Management

Olaf Penninga

Robeco Asset Management

Abstract

The paper proposes a new measure of spread exposure for corporate bonds portfolios based on a detailed analysis of credit spread behavior. We find that changes in spreads are not parallel but rather linearly proportional to the level of spread, whereby bonds trading at wider spreads experience larger spread changes. Consequently, systematic spread volatility of a sector is proportional to its spread; similarly, the idiosyncratic spread volatility of a particular bond or issuer is proportional to its spread, irrespective of sector, maturity and time period. We confirm that the behavior of spreads results in excess return volatility being proportional to Duration Times Spread (DTS). We demonstrate the advantage of DTS over spread-duration in predicting future excess return volatility, index replication and portfolio construction and discuss the implications of our findings for the formulation of investment constraints, asset allocation, risk modeling and performance attribution.

Keywords: credit risk, corporate bonds

JEL Classification: C13, G12

Suggested Citation

Ben Dor, Arik and Dynkin, Lev and Hyman, Jay and Houweling, Patrick and Leeuwen, Erik van and Penninga, Olaf, Dts (Duration Times Spread). Journal of Portfolio Management, Winter 2007. Available at SSRN: https://ssrn.com/abstract=956825

Arik Ben Dor (Contact Author)

Lehman Brothers, New York - Fixed Income Research ( email )

745 Seventh Avenue
New York, NY 10019
United States

Lev Dynkin

Lehman Brothers ( email )

9th Floor
New York, NY 10013
United States

Jay Hyman

Lehman Brothers ( email )

Nahshon 12
Ramat Hasharon, 47301
Israel

Patrick Houweling

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31-10-2243538 (Phone)

HOME PAGE: http://www.robeco.com/quant

Erik van Leeuwen

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Olaf Penninga

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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