Riding the yield curve: a spanning analysis

Riding the yield curve: a spanning analysis The average return on long-term bonds exceeds the return on short-term bills by a large amount over short investment horizons. A riding-the-yield-curve investment strategy takes advantage of the higher returns on longer term bonds. This strategy involves the purchase of bonds with maturities longer than the investment horizon and the sale of these bonds, before they mature, at the end of the investment horizon. Most of the literature that evaluates this strategy compares only ex post average returns or Sharpe ratios. In this paper, we use spanning tests to provide formal statistical evidence on the benefits of investing in long bonds when the investment horizon is short. The results for both the United States and Canada indicate that an investor with a short horizon is better off investing in short-term debt instruments than long-term bonds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Riding the yield curve: a spanning analysis

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Publisher
Springer US
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-011-0267-7
Publisher site
See Article on Publisher Site

Abstract

The average return on long-term bonds exceeds the return on short-term bills by a large amount over short investment horizons. A riding-the-yield-curve investment strategy takes advantage of the higher returns on longer term bonds. This strategy involves the purchase of bonds with maturities longer than the investment horizon and the sale of these bonds, before they mature, at the end of the investment horizon. Most of the literature that evaluates this strategy compares only ex post average returns or Sharpe ratios. In this paper, we use spanning tests to provide formal statistical evidence on the benefits of investing in long bonds when the investment horizon is short. The results for both the United States and Canada indicate that an investor with a short horizon is better off investing in short-term debt instruments than long-term bonds.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 5, 2012

References

  • Conditioning information and variance bounds on pricing kernels
    Bekaert, G; Liu, J
  • The advantages of using quarterly returns for long-term event studies
    Bremer, R; Buchanan, BG; English, PC

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