Optimal monetary and fiscal policies to maximise non-parallel risk premia in sovereign bond markets
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Date
Authors
Hariparsad, Sanveer
Mare, Eben
Journal Title
Journal ISSN
Volume Title
Publisher
MDPI
Abstract
In this paper, we analysed several emerging market (EM) and developed market (DM)
sovereign yield curves to identify the proportion of parallel and non-parallel shifts over time. We
found that non-parallel shifts are more prevalent in EM due to higher political and economic risks.
Key drivers include systemic risk events like wars, debt distress, and pandemics. By backtesting a
long butterfly strategy to extract non-parallel risk premia from June 2007 to March 2024, we observed
that steeper slopes and greater curvature result in higher returns. We also quantified monetary and
fiscal regimes to determine what types of policies are required to extract non-parallel risk premia
from these sovereign yield curves. Our research suggests that countries with opposing monetary
and fiscal policies possess higher return opportunities whilst countries with complementing policies
require tactical butterfly strategies to optimise returns.
Description
DATA AVAILABILITY STATEMENT: The original contributions presented in the study are included in the
article. Further inquiries can be directed to the corresponding author/s.
This article belongs to the Special Issue titled 'Monetary Policy in a Globalized World'.
This article belongs to the Special Issue titled 'Monetary Policy in a Globalized World'.
Keywords
Butterfly strategies, Fixed income risk premia, Monetary and fiscal policy, Slope, Curvature, SDG-08: Decent work and economic growth, SDG-16: Peace, justice and strong institutions, Emerging markets
Sustainable Development Goals
SDG-08:Decent work and economic growth
SDG-16:Peace,justice and strong institutions
SDG-16:Peace,justice and strong institutions
Citation
Hariparsad, Sanveer, and Eben Maré. 2024. Optimal Monetary and Fiscal Policies to Maximise Non-Parallel Risk Premia in Sovereign Bond Markets. Journal of Risk and Financial Management 17: 510. https://doi.org/10.3390/jrfm17110510.