Josef Zechner, Finance Professor, WU Vienna University of Economics and Business
This paper documents that even naïve cross-market diversification strategies lead to substantial improvements of risk-return relations of government bond portfolios. Motivated by this finding, we derive a global stochastic discount factor, which prices excess returns of individual bond markets and international bond portfolio strategies. The SDF is supported by standard validation tests, but the fraction of unpriced components of bond returns is high, at around 50%. Hedging internationally diversified bond portfolios against these unpriced risks improves portfolio performance substantially. The performance improvements are robust, even when conservative bounds on individual market weights are imposed. We find that the SDF cannot be explained by the principal components derived from bond returns.
Speaker bio
Josef Zechner is finance professor at the WU Vienna University of Economics and Business and Speaker of the Vienna Graduate School of Finance (VGSF). Before, he was professor at the University of Vienna and at the University of British Columbia, Canada. His research covers a broad set of topics in Corporate Finance, Banking, and Asset Management and is published in leading journals, including The Journal of Finance, The Journal of Financial Economics, the Review of Financial Studies, and the Journal of Political Economy. He is past president of the Western Finance Association, the European Finance Association and the German Finance Association and vice president of the Society of Financial Studies. He is also a member of the Austrian Academy of Science, a Research Fellow at the Centre for Economic Policy Research and holds an honorary doctoral degree from the Ludwig Maximilian University of Munich (LMU).
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