Handbook of Fixed-Income Securities

A comprehensive guide to the current theories and methodologies intrinsic to fixed-income securities

Written by well-known experts from a cross section of academia and finance, Handbook of Fixed-Income Securities features a compilation of the most up-to-date fixed-income securities techniques and methods. The book presents crucial topics of fixed income in an accessible and logical format. Emphasizing empirical research and real-life applications, the book explores a wide range of topics from the risk and return of fixed-income investments, to the impact of monetary policy on interest rates, to the post-crisis new regulatory landscape.
Well organized to cover critical topics in fixed income, Handbook of Fixed-Income Securities is divided into eight main sections that feature:

• An introduction to fixed-income markets such as Treasury bonds, inflation-protected securities, money markets, mortgage-backed securities, and the basic analytics that characterize them

• Monetary policy and fixed-income markets, which highlight the recent empirical evidence on the central banks' influence on interest rates, including the recent quantitative easing experiments

• Interest rate risk measurement and management with a special focus on the most recent techniques and methodologies for asset-liability management under regulatory constraints

• The predictability of bond returns with a critical discussion of the empirical evidence on time-varying bond risk premia, both in the United States and abroad, and their sources, such as liquidity and volatility

• Advanced topics, with a focus on the most recent research on term structure models and econometrics, the dynamics of bond illiquidity, and the puzzling dynamics of stocks and bonds

• Derivatives markets, including a detailed discussion of the new regulatory landscape after the financial crisis and an introduction to no-arbitrage derivatives pricing

• Further topics on derivatives pricing that cover modern valuation techniques, such as Monte Carlo simulations, volatility surfaces, and no-arbitrage pricing with regulatory constraints

• Corporate and sovereign bonds with a detailed discussion of the tools required to analyze default risk, the relevant empirical evidence, and a special focus on the recent sovereign crises

A complete reference for practitioners in the fields of finance, business, applied statistics, econometrics, and engineering,

Handbook of Fixed-Income Securities is also a useful supplementary textbook for graduate and MBA-level courses on fixed-income securities, risk management, volatility, bonds, derivatives, and financial markets.

Pietro Veronesi, PhD, is Roman Family Professor of Finance at the University of Chicago Booth School of Business, where he teaches Masters and PhD-level courses in fixed income, risk management, and asset pricing. Published in leading academic journals and honored by numerous awards, his research focuses on stock and bond valuation, return predictability, bubbles and crashes, and the relation between asset prices and government policies.

Auteur

Pietro Veronesi, PhD, is Roman Family Professor of Finance at the University of Chicago Booth School of Business, where he teaches Masters and PhD-level courses in fixed income, risk management, and asset pricing. Published in leading academic journals and honored by numerous awards, his research focuses on stock and bond valuation, return predictability, bubbles and crashes, and the relation between asset prices and government policies.

Contenu

Notes on Contributors xix

Preface xxv

PART I FIXED INCOME MARKETS 1

1 Fixed Income Markets: An Introduction 3

1.1 Introduction 3

1.2 U.S. Treasury Bills, Notes, and Bonds 7

1.3 Interest Rates, Yields, and Discounting 8

1.4 The Term Structure of Interest Rates 9

1.5 Pricing Coupon Notes and Bonds 17

1.6 Inflation-Protected Securities 19

1.7 Floating Rate Notes 22

1.8 Conclusion 24

References 24

2 Money Market Instruments 25

2.1 Overview of the Money Market 25

2.2 U.S. Treasury Bills 26

2.3 Commercial Paper 27

2.4 Discount Window 29

2.5 Eurodollars 29

2.6 Repurchase Agreements 32

2.7 Interbank Loans 35

2.8 Conclusion 40

References 40

3 Inflation-Adjusted Bonds and the Inflation Risk Premium 41

3.1 Inflation-Indexed Bonds 41

3.2 Inflation Derivatives 42

3.3 No-Arbitrage Pricing 43

3.4 Inflation Risk Premium 43

3.5 A Look at the Data 45

3.6 Conclusion 50

3.7 Appendix 50

3.8 Data Appendix 51

References 52

4 Mortgage-Related Securities (MRSs) 53

4.1 Purpose of the Chapter 53

4.2 Introduction to MRSs 54

4.3 Valuation Overview 57

4.4 Analyzing an MRS 62

4.5 Summary 72

References 73

PART II MONETARY POLICY AND FIXED INCOME MARKETS 75

5 Bond Markets and Monetary Policy 77

5.1 Introduction 77

5.2 High-Frequency Identification of Monetary Policy Shocks 78

5.3 Target Versus Path Shocks 84

5.4 Conclusions 90

References 91

6 Bond Markets and Unconventional Monetary Policy 93

6.1 Introduction 93

6.2 Unconventional Policies: The Fed, ECB, and BOE 94

6.3 Unconventional Policies: A Theoretical Framework 101

6.4 Unconventional Policies: The Empirical Evidence 104

6.5 Conclusions 115

References 116

PART III INTEREST RATE RISK MANAGEMENT 117

7 Interest Rate Risk Management and Asset Liability Management 119

7.1 Introduction 119

7.2 Literature Review 120

7.3 Interest Rate Risk Measures 120

7.4 Application to Asset Liability Management 127

7.5 Backtesting ALM Strategies 141

7.6 Liability Hedging and Portfolio Construction 142

7.7 Conclusions 144

7.8 Appendix: The Implementation of Principal Component Analysis 145

References 146

8 Optimal Asset Allocation in Asset Liability Management 147

8.1 Introduction 147

8.2 Yield Smoothing 150

8.3 ALM Problem 151

8.4 Method 155

8.5 Single-Period Portfolio Choice 156

8.6 Dynamic Portfolio Choice 160

8.7 Conclusion 164

8.8 Appendix: Return Model Parameter Estimates 165

8.9 Appendix: Benchmark Without Liabilities 165

References 166

PART IV THE PREDICTABILITY OF BOND RETURNS 169

9 International Bond Risk Premia 171

9.1 Introduction 171

9.2 Literature Review 172

9.3 Notation and International Bond Market Data 174

9.4 Unconditional Risk Premia 174

9.5 Conditional Risk Premia 177

9.6 Understanding Bond Risk Premia 185

9.7 Conclusion and Outlook 187

References 189

10 Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity 191

10.1 Introduction 191

10.2 Brief Literature Review 192

10.3 Bond Data and Definitions 193 10.4 Estimating the Liquidity Differential Between Inflation-Indexed and N...