Fixed income attribution

162 Pages·2005·1.708 MB·English

by  Andrew Colin

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Fixed Income Attribution
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Fixed Income Attribution
Andrew Colin
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LibraryofCongressCataloging-in-PublicationData
Colin,Andrew.
Fixedincomeattribution/AndrewColin.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN0-470-01175-0(Cloth:alk.paper)
1.Fixed-incomesecurities. 2.Portfoliomanagement. 3.Rateofreturn.
I.Title.
HG4650.C652005
332.63’2044—dc22
2004023806
BritishLibraryCataloguinginPublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
ISBN0-470-01175-0
Typesetin10/12ptTimesbyTechBooks,NewDelhi,India
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Thisbookisdedicatedtomywife,Linda
andourchildren,ThomasandRachel
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Contents
Preface xiii
Acknowledgements xv
ANoteonNotation xvii
PARTI: CONCEPTSOFATTRIBUTION 1
1 AttributionintheInvestmentProcess 3
1.1 Introduction 3
1.2 Theproblem 3
1.3 Addingvaluetoportfolios 4
1.4 Skillininvestment 5
1.4.1 Luck 5
1.4.2 Skill 5
1.5 Pickingthegoodfromthebad 5
1.6 Insightfromattribution 6
1.7 Example 7
1.8 Livingwithoutattribution 8
1.9 Whyisattributiondifficult? 9
1.10 Whatdoesthisbooknotcover? 9
1.11 Whatareweaimingfor? 9
2 CalculationofReturns 11
2.1 Introduction 11
2.2 Gettingitright 11
2.3 Rateofreturn 12
2.4 Linkingperformanceovermultipleintervals 12
2.5 Performanceofsinglesecuritiesinthepresenceofcashflows 12
2.6 Performanceofportfolioswithoutcashflows 13
2.7 Performanceofportfolioswithcashflows 13
2.8 Portfoliocashflowassumptions 14
2.9 Example1 15
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viii Contents
2.10 Performancecontribution 16
2.11 Bringingitalltogether 16
2.12 Theeffectsoffuturesonperformance 17
2.13 Shortposition 17
2.14 Example2:Someunusualassetallocations 17
2.15 Example3:Apathologicalcase 18
2.16 Example4:Aportfoliowithzeromarketvalue 19
2.17 Geometriccompounding 19
2.17.1 Stockreturn 19
2.17.2 Portfolioreturn 20
2.17.3 Sectorreturn 20
2.18 Performancefromseveralsourcesofreturn 20
3 SimpleAttribution 23
3.1 Introduction 23
3.2 Equityattribution 23
3.3 Additiveattribution 24
3.4 Basicattribution:top-downorbottom-up? 25
3.5 Whichassumptionstouse? 26
3.6 Example 27
3.6.1 Measuringoverallinvestmentperformance 27
3.7 Attributionatthesectorlevel 28
3.8 Attributionforsinglestocks 29
3.9 Combiningattributionreturnsovertime 31
3.10 Self-consistencyacrosstime 32
3.11 Summary 33
4 YieldCurvesinAttribution 35
4.1 Introduction 35
4.2 Yieldcurves 35
4.3 Whatisayieldcurve? 36
4.4 Whyyieldcurvesmatterinattribution 36
4.5 Differenttypesofyield 37
4.5.1 Couponrate 37
4.5.2 Currentyield(orrunningyield) 37
4.5.3 Yieldtomaturity 37
4.6 Zero-couponyield 38
4.7 Sovereignandcreditcurves 38
4.8 Whatshouldacurvelooklike? 38
4.9 Differenttypesofcurve–advantagesanddisadvantages 39
4.9.1 Parcurves 39
4.9.2 Durationcurves 39
4.9.3 Zero-couponcurves 39
4.10 Comparingdifferentcurvetypes 40
4.11 Howdoyieldcurvesbehave? 40
4.12 Creditcurves 43
4.13 Findingyieldcurvedata 43
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Contents ix
5 InterestRateRiskandPortfolioManagement 45
5.1 Introduction 45
5.2 Returninfixedincomeportfolios 45
5.3 Risknumbersandinterestratesensitivity 45
5.4 Aggregatingrisknumbers 46
5.5 Hedgingrisk 47
5.6 Portfoliostructure 47
5.7 Riskimmunization 48
6 MeasuringChangesinYieldCurves 51
6.1 Introduction 51
6.2 Curveshapes 51
6.3 Curves–therawdata 51
6.4 Atypicalcurvemovement 51
6.5 Describingcurvechanges 53
6.5.1 Shouldonegoanyfurther? 55
6.5.2 Canoneuseothermovementdescriptions? 55
6.6 Workedexamples 55
6.7 Model-freerepresentationsofcurves 56
6.8 Fittedmodelrepresentations 57
6.9 Shiftandcurvepositioninganalysis 57
6.10 Polynomialtermstructuremodels 58
6.10.1 Example1:Workedexampleforpolynomialmodel 59
6.11 Nelson–Siegeltermstructuremodels 60
6.11.1 Example2:WorkedexampleforNelson–Siegelmodel 62
6.12 Principalcomponentanalysis 63
6.13 Fittingdatatomodels 64
6.14 Constraintsincurvefitting 64
7 ConvertingYieldMovementsintoPerformance 65
7.1 Pricingfromfirstprinciples 65
7.2 Measuringtheeffectsofyieldcurveshifts 66
7.3 Perturbationalpricing 67
PARTII: SOURCESOFATTRIBUTIONRETURN 71
8 TheHierarchyofFixedIncomeReturns 73
8.1 Subjectivityinattribution 73
8.2 Excessprecision 73
9 YieldReturnandCouponReturn 75
9.1 Yieldreturn 75
9.2 Decompositionintocouponandconvergencereturn 75
9.3 Couponreturn 75
9.4 Convergencereturn 76
9.5 Decompositionintosystematicandspecificreturn 76
9.6 Calculatingyieldreturn 77