Profiting from Mean-Reverting Yield Curve Trading Strategies

Abstract

This figure plots the time series of 10-year moving average of monthly profits for strategy 2-B. Throughout the entire sample period, the 10-year moving average of profits stayed around 0.015 to 0.02 (this means that if we scale strategy 2-B to have the same volatility as a $1 investment in the S&P Index, the average profit per month is between $0.015 and $0.02).

Forecasting Bond Returns Using Jumps in Intraday Prices

“…Mean reversion is simply the excess return over these two years, hence including all trading days in contrast to only the days with a jump. We find that mean reversion does not work real-time, confirming the results of Chua et al [2006].…”

Varying risk premia in international bond markets

“…Unless the yield curve is very steep or there are massive changes in the yield curve during the holding period, such a position should earn a positive return. Refer to Chua et al (2006) and Bieri and Chincarini (2005) for a more detailed and precise discussion. 4 The relationship between the auxiliary index n and our superscripts u for the bond maturity as well as i for the forward rates can be expressed as u = 12n and i = 12n, respectively.…”

“…Fixed income trading strategies in their classic form exploit features of the yield curve. Chua et al (2006) and Bieri and Chincarini (2005) play different points on the yield curve against each other in simultaneous trades. 3 Duarte et al (2005) also analyze such yield curve based strategies but extend their article to swap spread arbitrage, mortgage arbitrage, volatility arbitrage, and capital structure arbitrage.…”

Predictability in bond returns using technical trading rules

“…Ironically, a part of the replication strategy would have involved total return swaps offered by now defunct Lehman Brothers. Chua, Koh, and Ramaswamy (2006) also argue that transaction costs can be significantly reduced by structuring derivatives trades on a notional basis without actually funding and holding the bonds.…”

“…Ilmanen and Byrne (2003) find that bond yields tend to experience trend continuation in the run-up to major events such as a release of the U.S. non-farm payroll report, and Chua, Koh, and Ramaswamy (2006) show that a small number of trading strategies focusing on the mean-reversion of the yield spreads can be highly A C C E P T E D M A N U S C R I P T 6 profitable. Boyd and Mercer (2010) find that successful trading strategies tied to yields on bonds with short maturities can be exclusively based on the use of past information, while Moskowitz, Ooi, and Pedersen (2012) document a significant time-series momentum in the U.S. Treasury bond futures.…”