AttributionFixedIncome: fixed income attribution

In R-Finance/PortfolioAttribution: Performance attribution tools used for identifying sources of portfolio return and risk.

Description

Performs fixed income attribution. The investment decision process for bond managers is very different from that of equity managers, therefore for most fixed income investment strategies the standard Brinson model is not suitable. Bonds are simply a series of defined future cash flows which are relatively easy to price. Fixed income performance is therefore driven by changes in the shape of the yield curve. Systematic risk in the form of duration is a key part of the investment process. Fixed income attribution is, in fact, a specialist form of risk-adjusted attribution. The arithmetic attribution is handled using weighted duration approach (Van Breukelen, 2000). The allocation, selection and currency allocation effects for category i are:

A_{i} = (D_{pi}\times w_{pi}-D_{β}\times D_{bi}\times w_{pi}) \times (-Δ y_{bi} + Δ y_{b})

S_{i} = D_{i}\times w_{pi}\times (-Δ y_{ri} + Δ y_{bi})

Ci = (wpi - wbi) * (ci + Rfi - c')

where wpi - portfolio weights, wbi - benchmark weights, Di - modified duration in bond category i. Duration beta:

Dbeta = Dr / Db

Dr - portfolio duration, Db - benchmark duration, Dbi - benchmark duration for category i, Dpi - portfolio duration for category i, Delta yri - change in portfolio yield for category i, Delta ybi - change in benchmark yield for category i, Delta yb - change in benchmark yield, Rci - currency returns for category i, Rfi - risk-free rate in currency of asset i,

c'= ∑_{i}w_{bi}\times(R_{ci}+R_{fi})

The geometric attribution is adapted using Van Breukelen (2000) approach for the arithmetic attribution. The individual allocation and selection effects are computed as follows:

Ai = Di * wpi - Dbeta * Dbi * wbi

Si = Dpi / Dbi * (Rbi - Rfi) + Rfi

Usage

  AttributionFixedIncome(Rp, wp, Rb, wb, Rf, Dp, Db, S,
    wbf, geometric = FALSE)

Arguments

Rp	T x n xts, data frame or matrix of portfolio returns
wp	vector, xts, data frame or matrix of portfolio weights
Rb	T x n xts, data frame or matrix of benchmark returns
wb	vector, xts, data frame or matrix of benchmark weights
Rf	T x n xts, data frame or matrix with risk free rates
Dp	T x n xts, data frame or matrix with portfolio modified duration
Db	T x n xts, data frame or matrix with benchmark modified duration
wbf	vector, xts, data frame or matrix with benchmark weights of currency forward contracts
S	(T + 1) x n xts, data frame or matrix with spot rates. The first date should coincide with the first date of portfolio returns
geometric	- TRUE/FALSE for geometric/arithmetic attribution

Value

list with total excess returns decomposed into allocation, selection (and currency effects)

Author(s)

Andrii Babii

References

Bacon, C. Practical Portfolio Performance Measurement and Attribution. Wiley. 2004. Chapter 7
Van Breukelen, G. Fixed income attribution. Journal of Performance Measurement. Sumer. p. 61-68. 2000

See Also

Attribution.levels, Attribution.geometric

Examples

data(attrib)
AttributionFixedIncome(Rp = attrib.returns[, 1:10], wp = attrib.weights[1, ], Rb = attrib.returns[, 11:20],
wb = attrib.weights[2, ], Rf = attrib.returns[, 23:32], Dp = attrib.returns[, 63:72], Db = attrib.returns[, 73:82],
S = attrib.currency[, 11:20], wbf = attrib.weights[4, ], geometric = FALSE)

R-Finance/PortfolioAttribution documentation built on May 8, 2019, 4:48 a.m.