The performance of deterministic and stochastic interest rate risk measures : Another Question of Dimensions?

The efficiency of traditional and stochastic interest rate risk measures is compared under one-, two-, and three-factor no-arbitrage Gauss-Markov term structure models, and for different immunization periods. The empirical analysis, run on the German Treasury bond market from January 2000 to December 2010, suggests that: i) Stochastic interest rate risk measures provide better portfolio immunization than the Fisher-Weil duration; and ii) The superiority of the stochastic risk measures is more evident for multi-factor models and for longer investment horizons. These findings are supported by a first-order stochastic dominance analysis, and are robust against yield curve estimation errors.info:eu-repo/semantics/publishedVersio

Term structure information and bond strategies

We examine term structure theories by using a novel approach. We form bond investment strategies based on different theories of the term structure in order to determine which strategy performs best. When using a manipulation-proof performance measure, we find that consistent with prior literature, an active strategy that is based on time varying term premiums can indeed form the basis of a successful bond strategy that outperforms an unbiased expectation inspired passive bond buy and hold strategy. This is true, however, for an earlier time period when the literature first made this claim. In a later time period, we find that the passive buy and hold strategy is significantly superior to all active strategies. This result is confirmed by statistical tests and it suggests that once it became known that an active strategy based on time varying term premiums could outperform a passive buy and hold strategy, the markets adjusted and arbitraged away this opportunity. Overall, it appears that the unbiased expectation hypothesis is the most likely explanation of the behaviour of the term structure during more recent times. This is because economically and statistically significant superior performance cannot be achieved if one uses information from the forward curve or the term structure as a guide to adjusting bond portfolios in response to changes in the term premium.This work was supported by Junta de Comunidades de Castilla-La Mancha [grant number PEII11-0031-6939]; Ministerio de Ciencia e Innovación [grant number ECO2011-28134] and partially supported by Fondo Europeo de Desarrollo Regional (FEDER) funds.

Optimal TIC Bids on Serial Bond Issues

Most serial bond issues are sold competitively on an NIC (net interest cost) basis. The municipality awards the issue to the bidder submitting the lowest NIC. Although it is often acknowledged that NIC is a defective measure of the interest cost and sometimes a costly one to the issuer, an alternative measure, the TIC (true interest cost, effective interest cost, interest cost according to the Canadian method, or the internal rate of return) is often regarded as too computationally difficult to employ. State and local governments are becoming increasingly aware of the internal rate of return or TIC as a measure of interest expense. The use of TIC as a method of awarding bond issues to underwriters is growing very rapidly. This paper contains a simple computer algorithm for calculating optimal bids on a TIC basis.