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Fixed Income Attribution

Day One

Laying the groundwork

  • Attribution: what it is, why it’s useful
  • The basics of performance measurement
  • Foreign exchange, hedging and benchmarks
  • Stock selection and asset allocation:
    • Brinson-Fachler and Brinson-Beebower-Hood models
  • Why forwards can drastically change an attribution analysis:
    • Brinson and Karnosky-Singer models
  • Why smoothing is needed and how to do it:
    • Carino, Menchero, Frongello, geometric and other models

Exercise: performance, equity attribution, forwards and smoothing in practice

Review of fixed income fundamentals

  • A quick overview of fixed income risk; a bond as a bundle of risks
  • Yield curves: par, zero and real
  • Pricing, risk and the fundamental attribution equation

Exercise: Breaking down the yield curve

Decomposing fixed income return

  • Carry and roll-down return
  • Risk-free curve return:
    • duration
    • shift/twist/butterfly
    • key rate durations
    • principal components
    • two and three factor models to describe yield curve movements
  • Sector and credit return:
    • country spread
    • spread change allocation and selection
    • sector and security-specific returns
  • Paydown return for amortizing securities, convexity return, repricing return, trading return
  • Widely used attribution models:
  • Campisi
  • Tim Lord
  • Van Breukelen
  • top-down
  • EMD
  • high-yield

Exercise: Different approaches to attribution


Day Two

Attribution by security type

  • Bonds and perpetuals
  • Money markets: Cash, bills, discount securities, CDs, FRNs, forwards
  • Inflation-linked securities and breakeven return
  • Futures and the cheapest to deliver
  • Sinkers: amortizing bonds, MBS and ABS
  • Swaps
  • Credit derivatives
  • Options and callable/puttable bonds

Exercise: Running attribution on a real portfolio

Attribution and risk

  • Applying attribution to Value at Risk: calculating VaR and ETL on attribution returns

Bringing it together

  • Useful tricks and short-cuts
  • Reporting and residuals
  • Other attribution models (style attribution, risk attribution, stochastic attribution)

Various other examples will be shown during the course, including:

  • Duration attribution
  • Assessing curve steepening
  • Sector and credit spread analyses
  • Breakeven trades in inflation-linked portfolios
  • Barbell and other curve positioning strategies
  • High-yield attribution
  • Top-down attribution
  • Handling options

In addition, answers to the following questions will be discussed:

  • Curvature versus convexity: what’s the difference?
  • What is the right way to measure parallel shift?
  • Why a zero coupon bond shows time return without accruing interest?
  • How many risk factors has an FRN?
  • Modified duration, Fisher-Weil duration or DV01: which risk measure is best for attribution?
  • How to handle hedged benchmark issues?


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