Riding the yield curve : is it beneficial on a risk-adjusted basis? : exploration of the Norwegian fixed income market
Abstract
In this paper, we examine if riding the yield curve strategy in the Norwegian fixed income market is beneficial on a risk-adjusted basis. The strategy is based on purchasing an instrument longer than the investor’s holding period and selling it at the end of the holding period. This is done in the pursue of higher returns and to capitalise on the fact that long-term rates are typically higher than short-term rates. It is compared to a buy-and-hold strategy, where the investor buys instruments with maturity equal to their holding period.
Our results show that riding the yield curve does provide excess returns compared to a buy-and-hold strategy, where returns can be enhanced with timing strategies. Excess returns from riding the yield curve, however, comes with increased risk. Nonetheless, a timing strategy based on the slope of the yield curve obtains some positive alphas. This strategy provides, on average, 4.29 percent in annualised excess returns when a ten-year instrument is ridden over a two-year holding period.