Does duration extension enhance excess returns?

Working paper no 10, 2003

Authors Berndsen, Jan
Subject Financial markets and financial stability; Accounts of Denmarks Nationalbank; Financial sector; Accounts and risk management
Type Working paper
Year 2003
Published 11 April 2003
Many financial institutions voluntarily undertake additional interest rate exposure, due to their short-term funding and the placements of their assets in longer term bonds. Based on realised total bond returns of the major bond markets this paper assesses whether a fixed-income investor is actually rewarded by taking this additional interest rate risk. Unfortunately, the question raised in the title of this article can not clearly be anwered. The outcome of the empirical analysis has shown that returns, return volatilities and their correlations are time-varying. However, some investment policy implications and conclusions can be stated, but caution is warranted when interpreting the empirical findings.