Download PDF Introduction Short-rate martingale models were among the first approaches to the modelling of interest rate term structures, providing a flexible framework for pricing fixed-income securities and interest rate derivatives. These models describe the evolution of the continuous short rate as a stochastic process and are widely used in Read more…
Download PDF Introduction Behavioral finance challenges traditional assumptions of rational investor decision-making as behavioral biases systematically influence investment decisions in the financial world. This article explores how these biases influence investment decisions and examines how financial product design can exploit or mitigate such biases. First, we explain the fundamental concept Read more…
Download PDF Introduction This article expands on BSIC’s previous work on systematic credit by investigating further the use and implementation of factors in the investment-grade corporate bond market. The article starts by discussing the definition of factors used in the analysis and presents two different approaches to the construction and Read more…
Download PDF Introduction In fixed income trading, managing interest rate risk is a critical task for traders and portfolio managers. While traditional hedging tools that rely on duration or convexity are a good indication of how prices react to yield changes, they are based on limited assumptions with significant pitfalls Read more…
Download PDF Introduction Since its initial birth in medieval ages, and its formal establishment in the 20th century, in the past fifty Islamic finance has seen tremendous growth. In recent times Shari’ah-compliant bonds have been issued to many countries worldwide, including Nigeria, United Kingdom, and Malaysia. Nowadays, the Maldives are Read more…
Download PDF Introduction In this article we present a systematic, factor-based approach to credit investing. Our aim is to give the reader a wholistic view of the process that brings to life a systematic investment strategy: from the collection of data, a non-trivial task within the credit space, to the Read more…
Download PDF Introduction Catastrophe bonds (CAT bonds), also called “Act-of-God” bonds, or “cat-in-the-box” bonds, have emerged as a compelling investment strategy, particularly highlighted by their performance in 2023, where they generated the best returns (+19.69%) of any alternative investment strategy, according to Preqin. These instruments are key for the insurance Read more…
Download PDF Introduction Convertible bonds are a unique way of raising capital which allows investors to convert the security into a predefined number of shares of common stock given by the conversion ratio. Convertible bonds have a long history, dating back to the 19th century when American railway firms were Read more…
Download PDF Introduction Interest rate derivatives (IRD) represent the largest segment of the OTC derivative market. As of June 2023, the global OTC derivatives notional outstanding amounted to $714.7tn as reported by the Bank for International Settlements (BIS). The biggest share of this market is represented by IRD and FX Read more…
Download PDF Introduction During the last months, and especially from September, long-duration bonds experienced a dramatic sell-off, which pushed yields to historically elevated levels: U.S. long-term interest rates reached the highest level since 2007, while European bonds have not been so attractive since the Euro sovereign debt crisis in 2012. Read more…
Download PDF Introduction A yield curve depicts the returns of fixed income securities against their term, or time to maturity. In this article, we explain the role that the discount function and forward rates have in the creation of a yield curve and compare different methodologies to fit the yield Read more…
Download PDF Introduction In 2022, rates traders have had to navigate a landscape of deteriorating liquidity in sovereign debt markets. Over the past few years, there have been multiple episodes of severe illiquidity in US Treasuries and related markets. Firstly, US repo rates spiked in September 2019, with intraday secured Read more…
Download PDF Introduction: Fixed Income Markets Performance High inflation and rising interest rates have governed the credit markets in 2022. Year-to-date, high yield bonds are down approximately 16% and investment grade bonds are down approximately 23%. The 2022 macroeconomic environment has wiped away the strong recovery seen by the credit Read more…
Download PDF Abstract While the literature investigating risk premia driving the cross section of stock returns is extensive, fewer studies analyze corporate bond returns. We set out to understand which factors and firm characteristics command a premium in terms of expected returns on corporate bonds, both in the investment grade Read more…
Download PDF This article is part of our series that discusses the impact of low and negative interest rates on several asset classes. Here we will focus on the implications of NIRP on fixed income products. Introduction Today’s low or negative interest rates have already been experienced other times in Read more…