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Duration and bond returns : empirical tests

University of British Columbia

The purpose of this thesis is to empirically investigate the role of duration in explaining bond price volatility caused by interest rate movements. Specifically, Canadian and American market data are used to test whether Macaulay/Fisher and Weil duration is an adequate measure of basis risk for default-free government bonds during the 20-year sample period January 1961 to December 1980. The most important result of the study is that in either a Canadian or an American context there is no significant evidence to suggest that, on average, higher duration bonds earn higher returns. Specifically, there appears to be a negative, although insignificant, relationship on average between bond returns and duration. A possible explanation for this result is that interest rates have trended upwards over most of the sample period. American results suggest that when changes in the level of interest rates have been filtered out there is a positive, although insignificant, relationship between bond returns and duration. Other results of the study are that coupon rates are positively related to bond returns (perhaps due to a tax effect), and that bond pricing errors are often related to subsequent returns.

Text

2010-05-03

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http://hdl.handle.net/2429/24396

Business Administration

University of British Columbia

Graduate