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Bond Portfolio Strategies, Returns, and Skewness: A Note

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  • Fogler, H. Russell
  • Groves, William A.
  • Richardson, James G.

Abstract

The academic research has produced a series of contributions on optimal portfolio strategies (Bradley and Crane [1], Crane [4], Cheng [3], Fisher and Weil [5], Watson [9], Wolf [10]). Several of these studies--Bradley and Crane, Watson, and Wolf--conclude that an optimal strategy for bank portfolios would be a “dumbbell” strategy. Such a dumbbell strategy invests only in the shortest and longest maturities, ignoring the intermediate maturities. The logic is straightforward: liquidity risk is lowest in the shortest maturities and yield is generally highest in the longest maturities. The risk/return superiority of such a strategy was empirically verified by Watson, with subsequent confirmation by the Bradley and Crane tests via a stochastic dynamic programming formulation.

Suggested Citation

  • Fogler, H. Russell & Groves, William A. & Richardson, James G., 1977. "Bond Portfolio Strategies, Returns, and Skewness: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(1), pages 127-140, March.
    • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:01:p:127-140_02
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    Cited by:

    1. Schmidhammer, Christoph & Hille, Vanessa & Wiedemann, Arnd, 2020. "Performance of maturity transformation strategies," Discussion Papers 58/2020, Deutsche Bundesbank.
    2. Valeria V. Lakshina, 2019. "Do Portfolio Investors Need To Consider The Asymmetry Of Returns On The Russian Stock Market?," HSE Working papers WP BRP 75/FE/2019, National Research University Higher School of Economics.
    3. Lakshina, Valeriya, 2020. "Do portfolio investors need to consider the asymmetry of returns on the Russian stock market?," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).

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