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 in-depth 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 multi-factor 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
- 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 PCA-based 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: Intra-Currency 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: Cross-Currency Basis Swaps
Chapter 14: Relative Values of Bonds Denominated in Different Currencies
- 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 (Low-Risk Bonds)
- The ASW Model Revisited
- The Equilibrium in Case of JGBs (Risky Bonds)
- Chapter 15: Credit Default Swaps
- Chapter 16: USD Asset Swap Spreads versus Credit Default Swaps
Chapter 17: Options
- 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
- Title: Fixed Income Relative Value Analysis: A Practitioners Guide to the Theory, Tools, and Trades
- Release date: August 2013
- Publisher(s): Bloomberg Press
- ISBN: 9781118477212