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Bond Portfolio Strategies, Returns, and Skewness: A Note

Published online by Cambridge University Press:  19 October 2009

H. Russell Fogler ,
William A. Groves  and
James G. Richardson
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Extract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 1 , March 1977 , pp. 127 - 140
Copyright
Copyright © School of Business Administration, University of Washington 1977

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References

REFERENCES

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