As part of the series of the „Finance Research Seminar“, VGSF welcomes Giorgia Simion from WU Wien / VGSF to present her research paper.
Pricing and Constructing International Government Bond Portfolios
joint with Otto Randl and Josef Zechner
This paper derives a stochastic discount factor which prices currency-hedged international government bonds and bond portfolio strategies, using a projection on returns of the unconditional mean-variance efficient portfolio. Although global government bond markets exhibit a strong factor structure, these common sources of variation represent mostly unpriced risks. The market price of risk in bond markets exhibits significant time-variation, and is significantly negatively related to intermediaries‘ capital ratio and the global economic policy uncertainty. Hedging traditional factor- based bond portfolio strategies against unpriced risks improves their Sharpe ratios substantially, even when bounds on portfolio weights are imposed.
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