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The Alpha Team. How to Construct a Global Portfolio After a Yield Curve Inversion. Yield Curve. Professor Campbell Harvey developed a widely used measure called the yield curve to predict US Recessions Yield curve is the difference between long-term and short term interest rates - PowerPoint PPT Presentation
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The Alpha TeamThe Alpha Team
How to Construct a Global How to Construct a Global Portfolio After a Yield Curve Portfolio After a Yield Curve
InversionInversion
Yield CurveYield Curve
Professor Campbell Harvey developed a Professor Campbell Harvey developed a widely used measure called the yield curve widely used measure called the yield curve to predict US Recessionsto predict US Recessions
Yield curve is the difference between long-Yield curve is the difference between long-term and short term interest ratesterm and short term interest rates
With an inversion short-term rates are With an inversion short-term rates are greater than long-term rates indicating a shift greater than long-term rates indicating a shift in investors expectationsin investors expectations
Industry Standard Measures of Yield CurveIndustry Standard Measures of Yield Curve
Yield Curve Measure
-5
-4
-3
-2
-1
0
1
2
3
4
5
1971m
1
1972m
5
1973m
9
1975m
1
1976m
5
1977m
9
1979m
1
1980m
5
1981m
9
1983m
1
1984m
5
1985m
9
1987m
1
1988m
5
1989m
9
1991m
1
1992m
5
1993m
9
1995m
1
1996m
5
1997m
9
1999m
1
2000m
5
2001m
9
2003m
1
2004m
5
2005m
9
Date
Diff
ere
nce
10Y-3M 5Y-3M 5Y-6M 10Y-6M
US Yield Curve Relation to US GDP (1979 - 2005)
-10
-8
-6
-4
-2
0
2
4
6
8
10
19
79
q1
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
US GDP % Growth US5Y-3M
GoalsGoals
We wanted to investigate the international capacity of We wanted to investigate the international capacity of the yield curve measures.the yield curve measures.
First we wanted to see if the inversion of the yield First we wanted to see if the inversion of the yield curve predicted recessions in countries that are highly curve predicted recessions in countries that are highly correlated with the UScorrelated with the US
If so is there a consistent relationship between lag If so is there a consistent relationship between lag lengths?lengths?
Secondly, does the inversion of the US yield curve Secondly, does the inversion of the US yield curve indicate an inversion of the local yield curve measure?indicate an inversion of the local yield curve measure?
Finally, does the yield curve inversion for local yields Finally, does the yield curve inversion for local yields or for the US yield curve provide us with a simple or for the US yield curve provide us with a simple profitable trading strategy for these countries?profitable trading strategy for these countries?
Is the US Yield Curve Is the US Yield Curve predictive for recessions in predictive for recessions in foreign countries?foreign countries? The US yield curve has had much success in The US yield curve has had much success in
predicting US recessions, but does it also predicting US recessions, but does it also predict recessionary periods in the countries predict recessionary periods in the countries that are highly correlated with the US?that are highly correlated with the US?
To answer this question we first gathered To answer this question we first gathered data from the ten most heavily trading data from the ten most heavily trading countries with the UScountries with the US
Canada, Mexico, Japan, China, Great Britain, Canada, Mexico, Japan, China, Great Britain, Germany, France, South Korea, Taiwan, and Germany, France, South Korea, Taiwan, and AustraliaAustralia
Then looked for possible correlations Then looked for possible correlations between the US yield curve inversion with a between the US yield curve inversion with a possible recession in the foreign countriespossible recession in the foreign countries
Trade Balances Over Trade Balances Over TimeTime How the trade between the US How the trade between the US
and these countries changes over and these countries changes over time is important when analyzing time is important when analyzing the impact of the yield curve the impact of the yield curve measuremeasure
The expectation is that as trade The expectation is that as trade increases the impact of the yield increases the impact of the yield curve also increasescurve also increases
Trade Balances with United States(Medium Correlation)
-8000
-6000
-4000
-2000
0
2000
Date
Tra
de
Bal
ance
Mexico Australia
Trade Balance with United States (High Correlation Group)
-8000
-6000
-4000
-2000
0
2000
Jan-
85
Jan-
87
Jan-
89
Jan-
91
Jan-
93
Jan-
95
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Date
Trad
e B
alan
ce
Canada Germany France UK
Trade Balance with United States (Low Correlation)
-12000
-10000
-8000
-6000
-4000
-2000
0
2000
Jan-
85
Jan-
87
Jan-
89
Jan-
91
Jan-
93
Jan-
95
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Date
Trad
e B
alan
ce
South Korea Japan Taiwan China
GDP and US Yield GDP and US Yield CurveCurve Is the US yield curve a predictor Is the US yield curve a predictor
for foreign recessions?for foreign recessions?
US Yield Curve Relation to J apanese GDP(1979 - 2005)
-10
-8
-6
-4
-2
0
2
4
6
8
10
19
79
q1
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
US5Y-3M Japanese GDP
US Yield Curve Relation to UK GDP (1979 - 2005)
-10
-8
-6
-4
-2
0
2
4
6
8
10
19
79
q1
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
US5Y-3M UK GDP
US Yield Curve Relation to German GDP(1979 - 2005)
-10
-8
-6
-4
-2
0
2
4
6
8
10
19
79
q1
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th /
% R
etu
rn
US5Y-3M German GDP
US Yield Curve Relation to Australian GDP (1979 - 2005)
-10
-8
-6
-4
-2
0
2
4
6
8
10
19
79
q1
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
US5Y-3M Australian GDP
US Yield Curve Relation to Canadian GDP(1979 - 2005)
-10
-5
0
5
10
1979
q1
2Q19
80
3Q19
81
4Q19
82
1Q19
84
2Q19
85
3Q19
86
4Q19
87
1Q19
89
2Q19
90
3Q19
91
4Q19
92
1Q19
94
2Q19
95
3Q19
96
4Q19
97
1Q19
99
2Q20
00
3Q20
01
4Q20
02
1Q20
04
2Q20
05
Date (Quarter)
% G
row
th/ %
Retu
rn
US5Y-3M Canadian GDP
US Yield Curve Relation to Chinese GDP (1999 - 2005)
-10
-5
0
5
10
1Q19
99
3Q19
99
1Q20
00
3Q20
00
1Q20
01
3Q20
01
1Q20
02
3Q20
02
1Q20
03
3Q20
03
1Q20
04
3Q20
04
1Q20
05
3Q20
05
Date (Quarter)
% G
row
th/ %
Retu
rn
US5Y-3M Chinese GDP
US Yield Curve Relation to Korean GDP (1979 - 2005)
-10
-5
0
5
10
1Q
19
79
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
US5Y-3M Korean GDP
US Yield Curve Relation to Mexican GDP(1981 - 2005)
-10
-5
0
5
10
1Q
19
79
1Q
19
80
1Q
19
81
1Q
19
82
1Q
19
83
1Q
19
84
1Q
19
85
1Q
19
86
1Q
19
87
1Q
19
88
1Q
19
89
1Q
19
90
1Q
19
91
1Q
19
92
1Q
19
93
1Q
19
94
1Q
19
95
1Q
19
96
1Q
19
97
1Q
19
98
1Q
19
99
1Q
20
00
1Q
20
01
1Q
20
02
1Q
20
03
1Q
20
04
1Q
20
05
Date (Quarter)
%G
row
th/
% R
etu
rn
US5Y-3M Mexican GDP
US Yield Curve Relation to French GDP (1979 - 2005)
-10.00
-5.00
0.00
5.00
10.00
1Q19
79
2Q19
80
3Q19
81
4Q19
82
1Q19
84
2Q19
85
3Q19
86
4Q19
87
1Q19
89
2Q19
90
3Q19
91
4Q19
92
1Q19
94
2Q19
95
3Q19
96
4Q19
97
1Q19
99
2Q20
00
3Q20
01
4Q20
02
1Q20
04
2Q20
05
Date (Quarter)
% G
row
th/
% R
etu
rn
French GDP US5Y-3M
Country Specific Yield Country Specific Yield CurvesCurves The impact of the yield curve on GDP The impact of the yield curve on GDP
for foreign countries does not appear for foreign countries does not appear to be significantto be significant
The impact did not grow with trade The impact did not grow with trade (this result is further vindicated in our (this result is further vindicated in our regression analysis)regression analysis)
Does an inversion in the US yield curve Does an inversion in the US yield curve indicate inversion of country specific indicate inversion of country specific yield curves?yield curves?
US and France Yield Curve
-5
-4
-3
-2
-1
0
1
2
3
4
5
Date
Yie
ld
France US
US and Germany Yield Curves
-5.000
-4.000
-3.000
-2.000
-1.000
0.000
1.000
2.000
3.000
4.000
5.000
M2
1976
M4
1977
M6
1978
M8
1979
M10
198
0
M12
198
1
M2
1983
M4
1984
M6
1985
M8
1986
M10
198
7
M12
198
8
M2
1990
M4
1991
M6
1992
M8
1993
M10
199
4
M12
199
5
M2
1997
M4
1998
M6
1999
M8
2000
M10
200
1
M12
200
2
M2
2004
M4
2005
Date
Yie
ld
Germany US
US and UK Yield Curves
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
Date
Yie
ld
UK US
US and Canada Yield Curves
-5.000
-4.000
-3.000
-2.000
-1.000
0.000
1.000
2.000
3.000
4.000
5.000
M1
1971
M8
1972
M3
1974
M10
197
5
M5
1977
M12
197
8
M7
1980
M2
1982
M9
1983
M4
1985
M11
198
6
M6
1988
M1
1990
M8
1991
M3
1993
M10
199
4
M5
1996
M12
199
7
M7
1999
M2
2001
M9
2002
M4
2004
M11
200
5
Date
Yie
ld
Canada US
US and Japan Yield Curves
-2
-1
0
1
2
3
4
M1
1985
M12
198
5
M11
198
6
M10
198
7
M9
1988
M8
1989
M7
1990
M6
1991
M5
1992
M4
1993
M3
1994
M2
1995
M1
1996
M12
199
6
M11
199
7
M10
199
8
M9
1999
M8
2000
M7
2001
M6
2002
M5
2003
M4
2004
M3
2005
Date
Yie
ld
Japan US
GDP and YieldGDP and Yield
As shown above an inversion in the As shown above an inversion in the US yield curve could be an US yield curve could be an indication that countries such as indication that countries such as Canada might also suffer a yield Canada might also suffer a yield curve inversioncurve inversion
Does the inversion of a country Does the inversion of a country specific yield curve act as a reliable specific yield curve act as a reliable measure for recessionary periods?measure for recessionary periods?
French GDP and Yield Curve
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
1979
q1
3Q19
80
1Q19
82
3Q19
83
1Q19
85
3Q19
86
1Q19
88
3Q19
89
1Q19
91
3Q19
92
1Q19
94
3Q19
95
1Q19
97
3Q19
98
1Q20
00
3Q20
01
1Q20
03
3Q20
04
Date
Yie
ld
GDP France Yield Curve France
Japan GDP and Yield Curve
-15
-10
-5
0
5
10
15
20
25
Date
Yie
ld
Japan GDP Japan Yield Curve
Canada GDP and Yield Curve
-6
-4
-2
0
2
4
6
8
10
12
Date
Yie
ld
Canada GDP Canada Yield Curve
UK GDP and UK Yield Curve
-20
-15
-10
-5
0
5
10
15
20
Date
Yie
ld
UK GDP UK Yield
Australia GDP and Yield Curve
-15
-10
-5
0
5
10
15
1979
q1
3Q19
80
1Q19
82
3Q19
83
1Q19
85
3Q19
86
1Q19
88
3Q19
89
1Q19
91
3Q19
92
1Q19
94
3Q19
95
1Q19
97
3Q19
98
1Q20
00
3Q20
01
1Q20
03
3Q20
04
Date
Yie
ld
Australia GDP Australia Yield Curve
Local Yield Curve Inversions and GDP UKLocal Yield Curve Inversions and GDP UK
Local Yield Curve Inversions and GDP GermanyLocal Yield Curve Inversions and GDP Germany
Local Yield Curve Inversions and GDP CanadaLocal Yield Curve Inversions and GDP Canada
Local Yield CurveLocal Yield Curve
The local yield curve measures do The local yield curve measures do not appear to be dependable not appear to be dependable predictors of local recessionary predictors of local recessionary periods in GDPperiods in GDP
Further statistical tests should be Further statistical tests should be preformedpreformed
Yield Curve and Equity Yield Curve and Equity MarketsMarkets
Due to the fact that the US yield Due to the fact that the US yield curve had little predictive power curve had little predictive power as to foreign recessions we turned as to foreign recessions we turned our attention to the equity our attention to the equity marketsmarkets
Does the US yield curve have Does the US yield curve have predictive power for foreign predictive power for foreign equity returns?equity returns?
Yield curve inversion coincides with a negative/depressed average return.
Holds for all periods expect September 1998 to December 1998.– Russian Government Default – LTCM Bailout
Dates United States Australia Canada Germany Japan United Kingdom France Korea Mexico Taiwan China1/71 to 5/73 0.54 0.99 1.16 1.80 4.62 1.60 2.18
6/73 to 12/74 -1.72 -2.41 -1.06 0.36 -1.92 -4.83 -2.651/75 to 10/78 1.08 1.55 0.82 1.97 2.39 3.31 2.03
11/78 to 4/80 1.05 2.90 3.50 -0.70 -0.70 1.86 1.575/80 to 9/80 3.58 6.72 4.26 1.06 3.64 4.62 1.20
10/80 to 9/81 -0.06 -1.95 -1.60 -1.70 0.99 -2.10 -2.9910/81 to 1/82 1.40 -2.12 -0.68 0.90 2.25 6.52 1.66
2/1982 -5.16 -10.58 -7.66 -1.17 -7.95 -7.16 4.863/82 to 4/89 1.61 1.87 1.39 1.81 2.77 1.89 2.14 4.77 4.94 9.28
5/89 to 1/90 1.06 1.62 0.57 5.17 -0.12 1.41 2.68 -0.31 6.86 5.552/90 to 8/98 1.38 0.57 0.52 1.02 -0.40 1.17 1.04 -0.69 1.61 -0.16 -1.51
9/98 to 12/98 6.77 5.23 4.42 2.67 5.64 2.92 3.58 21.27 7.53 4.25 12.031/99 to 6/00 1.11 1.15 3.80 0.81 2.58 0.04 1.89 4.35 3.42 2.64 1.80
7/00 to 2/01 -2.01 -1.26 -3.09 -1.56 -3.96 -0.95 -2.56 -5.07 -0.93 -3.95 -3.743/01 to 12/05 0.24 1.65 1.27 0.55 0.64 0.59 0.60 2.60 2.00 0.58 0.88
0.5839 0.7606 0.6968 0.3783 0.7073 0.6808 0.3867 0.5452 0.3947 0.4191Correlation with U.S. Equity
Average Equity Returns During Inversion and Contango
Trading StrategyTrading Strategy
Long position during contango, short position during inversion.
Is there a lag between inversion and negative equity return? – Yes, but built in.
Trading StrategyTrading Strategy
Extend this strategy to foreign equity.
Three Correlation GroupsThree Correlation Groups– HighHigh– MiddleMiddle– LowLow
Average Equity ReturnsAverage Equity Returns
Average Returns (High Correlation Group)
-10.00
-5.00
0.00
5.00
10.00
1/71
to 5
/73
6/73
to 1
2/74
1/75
to 1
0/78
11/7
8 to
4/8
0
5/80
to 9
/80
10/8
0 to
9/8
1
10/8
1 to
1/8
2
1/19
78
3/82
to 4
/89
5/89
to 1
/90
2/90
to 8
/98
9/98
to 1
2/98
1/99
to 6
/00
7/00
to 2
/01
3/01
to 1
2/05
Period
Avera
ge %
To
tal
Retu
rn
United States ( Canada.)7606 ( United Kingdom.)7073
( Germany.)6968 ( France.)6808
Average Equity ReturnsAverage Equity Returns
Average Returns (Middle Correlation Group)
-10.00
-5.00
0.00
5.00
10.00
1/71
to 5
/ 73
6/73
to 1
2/74
1/75
to 1
0/78
11/7
8 to
4/ 8
0
5/80
to 9
/ 80
10/8
0 to
9/ 8
1
10/8
1 to
1/ 8
2
1/197
8
3/82
to 4
/ 89
5/89
to 1
/ 90
2/90
to 8
/ 98
9/98
to 1
2/98
1/99
to 6
/ 00
7/00
to 2
/ 01
3/01
to 1
2/05
Date
Avera
ge %
To
tal
Retu
rn
United States ( Australia.)5839 ( Mexico.)5452
Average Equity ReturnsAverage Equity Returns
Average Returns (Low Correlation Group)
-10.00
-5.00
0.00
5.00
10.00
1/71
to 5
/ 73
6/73
to 1
2/74
1/75
to 1
0/78
11/7
8 to
4/ 8
0
5/80
to 9
/ 80
10/8
0 to
9/ 8
1
10/8
1 to
1/ 8
2
1/197
8
3/82
to 4
/ 89
5/89
to 1
/ 90
2/90
to 8
/ 98
9/98
to 1
2/98
1/99
to 6
/ 00
7/00
to 2
/ 01
3/01
to 1
2/05
Date
Avera
ge %
To
tal
Retu
rn
United States ( China.)4191 ( Taiwan.)3947 ( Korea.)3867 ( Japan.)3783
Trading StrategyTrading Strategy
Exclude February 1990 to August 1998 and September 1998 to December 1998.– Strategy holds for 97 out of 106
periods.– 91.5%
Trading StrategyTrading Strategy
Trading strategy as a simple linear regression.– Equity Returnt=+*Inversion
Dummyt+*Inversion Dummyt*US5Y-3Mt
Expect the dummy coefficients to be negative. – Exceptions (Germany, China, Korea,
Mexico, Taiwan
Historical vs. Predicted Returns (Low Correlation)
-2
0
2
4
6
8
10
1/71to
5/73
1/75to
10/78
5/80to
9/80
10/81to
1/82
3/82to
4/89
2/90to
8/98
1/99to
6/00
3/01to
12/05Contango Periods
Average %
Retu
rn
s
( Japan.)3783 Japan Hat ( China.)4191 China Hat( Korea.)3867 Korea Hat ( Taiwan.)3947 Taiwan Hat
Historical vs. Predicted Returns (Low Correlation Group)
-10
-5
0
5
10
15
20
25
6/73 to12/74
11/78to 4/80
10/80to 9/81
28521 5/89 to1/90
9/98 to12/98
7/00 to2/01
Inversion Periods
Avera
ge %
Retu
rns
( Japan.)3783 Japan Hat ( China.)4191 China Hat( Korea.)3867 Korea Hat ( Taiwan.)3947 Taiwan Hat
Historical vs. Predicted Returns (Middle Correlation Group)
-3
-2
-1
0
1
2
3
4
5
6
7
8
1/71to
5/73
1/75to
10/78
5/80to
9/80
10/81to
1/82
3/82to
4/89
2/90to
8/98
1/99to
6/00
3/01to
12/05
Contango Periods
Avera
ge %
Retu
rn
( Australia.)5839 Australia Hat ( Mexico.)5452 Mexico Hat
Historical vs. Predicted Returns(Middle Correlation Group)
-12-10
-8-6-4-202468
10
6/73 to12/74
11/78to 4/80
10/80to 9/81
28521 5/89 to1/90
9/98 to12/98
7/00 to2/01
Inverstion Periods
Avera
ge %
Retu
rns
( Australia.)5839 Australia Hat ( Mexico.)5452 Mexico Hat
Historical vs. Predicted Returns (High Correlation Group)
-1
0
1
2
3
4
5
6
7
1/71 to5/73
1/75 to10/78
5/80 to9/80
10/81to 1/82
3/82 to4/89
2/90 to8/98
1/99 to6/00
3/01 to12/05
Contango Periods
Avera
ge %
Retu
rn
( Canada.)7606 Canada Hat
( Germany.)6968 Germany Hat
( United Kingdom.)7073 United Kingdom Hat
( France.)6808 France Hat
Historical vs. Predicted Returns (High Correlation Group)
-8-7-6-5-4-3-2-101234567
6/73 to12/74
11/78to 4/80
10/80to 9/81
28521 5/89 to1/90
9/98 to12/98
7/00 to2/01
Inversion Periods
Average %
Retu
rns
( Canada.)7606 Canada Hat
( Germany.)6968 Germany Hat
( United Kingdom.)7073 United Kingdom Hat
( France.)6808 France Hat
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Based on forecasting returns during most Based on forecasting returns during most recent US yield curve inversionrecent US yield curve inversion
From period of initial inversion forecast From period of initial inversion forecast future returns of correlated equity marketsfuture returns of correlated equity markets
Due to missing data, only Australia, Due to missing data, only Australia, Canada, France, Germany, Japan and UK Canada, France, Germany, Japan and UK consideredconsidered
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Optimize portfolio weights for period of Optimize portfolio weights for period of inversion. Discontinue strategy once inversion. Discontinue strategy once period of inversion ends.period of inversion ends.
Compare returns from optimal trading Compare returns from optimal trading strategy using forecast values (min of -strategy using forecast values (min of -20%, max of 50% weighting) with optimal 20%, max of 50% weighting) with optimal weightings up to beginning of inversion.weightings up to beginning of inversion.
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Using weightings from both strategies, Using weightings from both strategies, optimize determine returns to both optimize determine returns to both strategies given actual returns for sample strategies given actual returns for sample period.period.
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Based on forecasting returns during most Based on forecasting returns during most recent US yield curve inversionrecent US yield curve inversion
From period of initial inversion forecast From period of initial inversion forecast future returns of correlated equity marketsfuture returns of correlated equity markets
Due to missing data, only Australia, Due to missing data, only Australia, Canada, France, Germany, Japan and UK Canada, France, Germany, Japan and UK consideredconsidered
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Optimize portfolio weights for period of Optimize portfolio weights for period of inversion. Discontinue strategy once inversion. Discontinue strategy once period of inversion ends.period of inversion ends.
Compare returns from optimal trading Compare returns from optimal trading strategy using forecast values (min of -strategy using forecast values (min of -20%, max of 50% weighting) with optimal 20%, max of 50% weighting) with optimal weightings up to beginning of inversion.weightings up to beginning of inversion.
Alternative to L-S Trading StrategyAlternative to L-S Trading Strategy
Using weightings from both strategies, Using weightings from both strategies, optimize determine returns to both optimize determine returns to both strategies given actual returns for sample strategies given actual returns for sample period.period.
ResultsResults
Truncation
aus can ger jap uk france Total
weights -11% 7% 31% 35% 21% 16% 100%
er 0.97 0.93 1.19 1.26 1.25 1.25
sd7.2293706
55.6210408
35.9621808
16.6777541
16.9011665
76.6965588
2
Expected Return 1.24
Variance25.159137
3
Standard Deviation
5.01588849
ResultsResults
Prediction
aus can ger jap uk france Total
weights0.1121552
3
-0.0358451
0.26158159 0.0052277 0.2626654
0.39421516 1
er 0.97 0.93 1.19 1.26 1.25 1.25
sd7.2293706
55.6210408
35.9621808
16.6777541
16.9011665
76.6965588
2
Expected Return
1.21442434
Variance28.767985
8
Standard Deviation
5.36357957
