Volume 18, No. 6, 2021
Yield Curve Forecasting And Strategies
Rahul Rangotra
Abstract
This paper shows that yield curve (YC) is dynamic and in order to earn active returns in fixed income market, investors need to forecast YC. Vector Autoregression (VAR) modeling is employed in the paper to forecast shape of YC. Various YC strategies are suggested to earn active returns in fixed income market. Investment in Long Term Bonds (LTB) is suggested if YC is stable and slope of the YC is expected to decrease. In the same way, investment in Short Term Bonds (STB) and Medium Term Bonds (MTB) is suggested if curvature of the YC is expected to be more humped shaped and vice versa. Also, in case of expectations of increase (decrease) in interest rates, invest in low (high) duration bonds and if volatility of the YC is expected to increase (decrease) invest in bonds or portfolio of bonds with higher (lower) convexity.
Pages: 7063-7071
Keywords: Yield Curve, Shape of Yield Curve, Duration, Convexity, Vector Autoregression.