Book description
As western governments issue increasing amounts of debt, the fixed income markets have never been more important. Yet the methods for analyzing these markets have failed to keep pace with recent developments, including the deterioration in the credit quality of many sovereign issuers. In Fixed Income Relative Value Analysis, Doug Huggins and Christian Schaller address this gap with a set of analytic tools for assessing value in the markets for government bonds, interest rate swaps, and related basis swaps, as well as associated futures and options.
Taking a practitioner's point of view, the book presents the theory behind market analysis in connection with tools for finding and expressing trade ideas. The extensive use of actual market examples illustrates the ways these analytic tools can be applied in practice.
The book covers:
Statistical models for quantitative market analysis, in particular mean reversion models and principal component analysis.
An indepth approach to understanding swap spreads in theory and in practice.
A comprehensive discussion of the various basis swaps and their combinations.
The incorporation of credit default swaps in yield curve analysis.
A classification of option trades, with appropriate analysis tools for each category.
Fitted curve techniques for identifying relative value among different bonds.
A multifactor delivery option model for bond future contracts.
Fixed Income Relative Value Analysis provides an insightful presentation of the relevant statistical and financial theories, a detailed set of statistical and financial tools derived from these theories, and a multitude of actual trades resulting from the application of these tools to the fixed income markets. As such, it's an indispensable guide for relative value analysts, relative value traders, and portfolio managers for whom security selection and hedging are part of the investment process.
Table of contents
 Cover
 Contents
 Title
 Copyright
 Foreword
 Chapter 1: Relative Value

Part I: Statistical Models
 Chapter 2: Mean Reversion

Chapter 3: Principal Component Analysis
 Introduction: Goal and Method
 An Intuitive Approach toward PCA
 Factor Models: General Structure and Definitions
 PCA: Mathematics
 PCA as Factor Model
 Insight into Market Mechanisms through Interpretation of the Eigenvectors
 Applying Eigenvector Interpretation in Different Markets
 Decomposing Markets into Uncorrelated Factors
 Embedding PCA in Trade Ideas
 Appropriate Hedging
 Analyzing the Exposure of Trading Positions and Investment Portfolios
 Market Reconstruction and Forecasting
 A Yield Curve Model Based on PCA
 PCA as a Tool for Screening the Market for Trade Ideas
 PCA as a Tool for Asset Selection
 Example of a PCAbased Trade Idea
 Problems and Pitfalls of PCA 1: Correlation between Factors during Subperiods
 Problems and Pitfalls of PCA 2: Instability of Eigenvectors over Time
 PCA as a Tool to Construct New Types of Trades

Part II: Financial Models
 Chapter 4: Some Comments on Yield, Duration, and Convexity
 Chapter 5: Bond Futures Contracts
 Chapter 6: LIBOR, OIS Rates, and Repo Rates
 Chapter 7: IntraCurrency Basis Swaps
 Chapter 8: Theoretical Determinants of Swap Spreads
 Chapter 9: Swap Spreads from an Empirical Perspective
 Chapter 10: Swap Spreads as Relative Value Indicators for Government Bonds
 Chapter 11: Fitted Bond Curves
 Chapter 12: A Brief Comment on Interpolated Swap Spreads
 Chapter 13: CrossCurrency Basis Swaps

Chapter 14: Relative Values of Bonds Denominated in Different Currencies
 Introduction
 Calculating USD LIBOR Swap Spreads for Foreign Bonds
 Rich/Cheap Analysis through Fitted Curves for Bonds Denominated in Different Currencies
 Separate Yield Curves in Respective Currencies
 The Equilibrium between ASW and CCBS Markets
 The Equilibrium for Bunds (LowRisk Bonds)
 The ASW Model Revisited
 The Equilibrium in Case of JGBs (Risky Bonds)
 Conclusion
 Chapter 15: Credit Default Swaps
 Chapter 16: USD Asset Swap Spreads versus Credit Default Swaps

Chapter 17: Options
 Introduction
 A Brief Review of Option Pricing Theory
 Classification of Option Trades
 Option Trade Type 1: Single Underlying
 Option Trade Type 1: Two or More Underlyings
 Option Trade Type 2: Single Underlying
 Option Trade Type 2: Two or More Underlyings
 Option Trade Type 3: Factor Model for the Vega Sector
 Pitfalls of Option Trades of Type 3
 Conclusion: Summary of Option Trade Types and Their Different Exposure
 Chapter 18: Relative Value in a Broader Perspective
 Bibliography
 Index
Product information
 Title: Fixed Income Relative Value Analysis: A Practitioners Guide to the Theory, Tools, and Trades
 Author(s):
 Release date: August 2013
 Publisher(s): Bloomberg Press
 ISBN: 9781118477199
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