The Journal of Fixed Income

A Copula-Augmented Nelson-Siegel Model for ESG Bond Portfolio Optimization

2025-08-05T00:10:10+00:00

This paper presents a novel copula-based no-arbitrage pricing framework for forecasting bond returns and optimizing bond portfolios. Extending the dynamic Nelson-Siegel model with regular vine copulas for term structure dependencies, we generate step-ahead forecasts for zero-coupon bond yields, which are subsequently applied to obtain and simulate the no-arbitrage prices for both callable and non-callable fixed-coupon bonds. These simulated bond prices serve as inputs for a novel convex multiobjective portfolio optimization, incorporating key criteria such as ESG score, average return, Conditional Value-at-Risk (CVaR), distance-to-default, transaction cost, and option-adjusted duration and convexity. Applying our methodology to a dataset of 879 corporate bonds denominated in Euros from January 2016 to July 2024, we demonstrate that the suggested copula-based no-arbitrage pricing framework takes advantage of the yield curve non-linear dependence structure and offers bond portfolios that consistently outperform those portfolios based on the classical dynamic Nelson-Siegel approach and an equally weighted (EQW) benchmark in terms of higher returns and Sharpe ratios while effectively reducing tail risk.

A General Framework for Calculating Returns on Syndicated Loans

2025-08-06T13:09:38+00:00

We provide the general method for calculating returns on syndicated loans. Our approach accounts for amortization, price changes, coupon income, and fees, while allowing for floating benchmarks with caps and floors. Omitting any of these components may lead to biased return estimates that can be especially large in cross-sectional studies. A worked example illustrates implementation using real loan data. The return formula can be adapted for term loans, revolvers, or other credit instruments.

Central Banks’ Monetary Tones Across Economies

2025-09-09T15:06:38+00:00

This article documents that cross-economy variation in central banks’ monetary tones predicts subsequent changes in yields. We sort the cross-section of weekly monetary tones of developed economies’ central banks into low, mid, and high tones portfolios and record the average weekly change in yields, rebalancing weekly. We find a significant high-low yield change spread of 69 basis points annually, on average, over the period January 2015 – July 2024. When adding emerging economies’ central banks, the corresponding spread increases to 180 basis points. Performance is largely unaffected while controlling for fixed-income factors. We observe substantial heterogeneity in the time-series response of yields to tones for distinct developed economies’ central banks. We also find that more hawkish monetary tones tend to be associated with reductions in the slope of the yield curve.

Corporate bond returns: Does news sentiment matter?

2025-09-12T09:15:53+00:00

We examine whether news sentiment predicts corporate bond returns in both the cross-section and
time series. Using univariate and double-sorted portfolios by investment grade, issuer size, maturity,
and liquidity, we find that while some results are statistically significant, the economic magnitudes are
negligible. Unlike evidence in equities and the limited bond literature, our findings suggest that news
sentiment does not meaningfully explain the cross-sectional variation in corporate bond returns and
provides no incremental pricing power as a bond risk factor.

Riskless Principal Trades in Corporate Bond Markets

2025-09-18T07:19:59+00:00

We identify growth in riskless principal trades using corporate bond market trade data. These trades are arranged by a dealer that obtains compensation by marking up the price instead of charging a commission. In the U.S. markets, over the last 18 years, riskless principal trades increased from 16% to 42% of all customer trades, while the size of non-zero markups declined 48% on average, with most changes occurring recently. The growth in electronic trading systems undoubtedly explains these trends, but most traders cannot directly access these systems. Some changes to bond market structure could further decrease investor transaction costs.

Option Option-Implied Probabilities and Bond Valuation

2025-10-08T09:48:52+00:00

Traditional short-rate lattice models assume that interest rates move up or down with equal risk-neutral probability. This symmetry is a convenient modeling device, but it does not reflect how markets actually price risk. We recover contract-level risk-neutral probabilities using option data and find persistent and systematic departures from the 50/50 benchmark. These option-implied asymmetries vary across maturities and market conditions, particularly during volatile episodes such as the onset of the COVID-19 crisis. Embedding the recovered probabilities into bond valuation reveals significant consequences for practitioners. Symmetric models consistently misprice bonds by several basis points, bias expected holding-period returns, and generate hedge ratios that lead to larger tracking errors, higher turnover, and greater transaction costs. Models disciplined by option-implied probabilities produce bond valuations more consistent with market prices, return forecasts that better capture term premia, and hedges that perform more effectively. The results demonstrate that the symmetry assumption underlying standard short-rate trees is empirically false and economically costly to ignore.