Bond Market Index Research Articles

What Moves the Mortgage‐Backed Securities Market?

Using a vector autoregressive model with monthly data from 1988 through 2001, this study investigates the factors that drive the excess returns on a widely followed mortgage‐backed securities (MBS) index. We find that eight important economic variables (industrial productions, new home sales, bond horizon premium, bond quality premium, mortgage rate, refinancing proxy, general stock market index and world bond market index) appear to move the excess returns on MBS. Impulse response analysis and variance decomposition further indicate a strong dynamic relationship between MBS excess returns and changes in these economic variables. Additional analysis of Freddie Mac and Fannie Mae MBS also indicates that the risk of the MBS guarantor is an important determinant of the MBS return dynamics after the creation of the Office of Federal Housing Enterprise Oversight.

Short-sellers: The neglected breed

This paper shows that the short-sellers classification can shield a traditional investment portfolio against broad stock market declines. During the bull market of the 1990s the short-sellers strategy was crushed and a handful of remaining surviving funds managed to weather the storm. Short-sellers re-emerged at the start of the new millennium and have performed well compared to stock and bond market indices as well as to other hedge fund strategies. The conclusion is that the short-sellers strategy is a necessity in pension fund and institutional portfolios to protect investors from declining markets and should not be neglected.

Scenario modeling for the management of international bond portfolios

We address the problem of portfolio management in the international bond markets.Interest rate risk in the local market, exchange rate volatility across markets, and decisionsfor hedging currency risk are integral parts of this problem. The paper develops a stochasticprogramming optimization model for integrating these decisions in a common framework.Monte Carlo simulation procedures, calibrated using historical observations of volatilityand correlation data, generate jointly scenarios of interest and exchange rates. The decisionmaker's risk tolerance is incorporated through a utility function, and additional views onmarket outlook can also be incorporated in the form of user specified scenarios. The modelprescribes optimal asset allocation among the different markets and determines bond‐pickingdecisions and appropriate hedging ratios. Therefore, several interrelated decisions are castin a common framework, while in the past these issues were addressed separately. Empiricalresults illustrate the efficacy of the simulation models in capturing the uncertainties of theSalomon Brothers international bond market index.