Introducing global term structure into a risk parity framework: application to sovereign bonds

File pdf 957KB

In this paper, we aim at constructing a global risk model using the term structure from major bonds issuing countries. The goal is twofold: first this will allow quantifying global interest rate risk (level, slope and curvature effects), providing insights on global risks at play. Secondly, such information could be used in order to design sovereign bond indexes in a risk parity framework, where each country's sensitivity to global interest risk will be accounted for. More specifically, we propose two innovative indexing schemes, a first one where we equalize contribution to global level (parallel) risk exposure across countries, and a second one where we turn to both parallel and non-parallel risk exposure within a country. Finally, we demonstrate that the conjunctive use of these two approaches allows to efficiently tackle global interest rate risk while providing appealing risk-adjusted returns.

Author(s):

Lauren Stagnol    
Amundi - EconomiX (Université Paris X)
France