Mastering Attribution in Finance: A practitioner's guide to risk-based analysis of investment returns (Financial Times Series)

Mastering Attribution in Finance is a comprehensive guide to how attribution is used in equity and fixed income markets. Attribution in finance is a key investment and asset management process used in managed funds. A managed fund uses appropriate financial tools to make sure that the fund‘s value is maintained or increased. Attribution tools are used to analyse why a portfolio’s performance differs from a benchmark. The difference between the portfolio return and the benchmark return is known as the active return. As with all Mastering titles, this book is written by an expert in the field. It will show you how to: Understand how attribution is used in equity and fixed income markets Improve your knowledge of the mathematics used in performance and attribution Assess in greater detail the effects top-down attribution and attribution on specific types of fixed income security Broaden your awareness of performance and return Cover Title Page Copyright page Contents About the author Acknowledgements Preface 1 An introduction to attribution 1.1 Securities, portfolios and risk 1.2 Types of risk 1.3 Return and attribution 1.4 Strategy tagging 1.5 Types of attribution 1.6 Book structure Part 1 Equity attribution 2 The basics of performance measurement 2.1 Introduction 2.2 Defining return 2.3 Compounded returns 2.4 Time-weighted and money-weighted returns 2.5 Portfolio returns 2.6 Transactions and cash flows 2.7 Sector returns 2.8 Calculating portfolio returns over successive intervals 2.9 Futures cash offsets 2.10 Edge cases 2.11 External returns 2.12 Benchmarks 2.13 Active return 2.14 Stochastic attribution 2.15 Liability-driven investment (LDI) 3 Equity attribution 3.1 Introduction 3.2 Brinson attribution 3.3 Single-level Brinson attribution 3.4 Multiple-level asset allocation 3.5 Off-benchmark securities 3.6 Successive portfolio attribution 3.7 Security-level attribution 4 Currency attribution 4.1 Introduction 4.2 Currency attribution returns 4.3 Performance and attribution on unhedged portfolios 4.4 Attribution on an unhedged portfolio 4.5 Portfolio hedging 4.6 Currency forwards 4.7 Hedging and risk 4.8 Naïve attribution on a hedged portfolio 4.9 Measuring hedge returns 4.10 Brinson attribution on a hedged portfolio 4.11 Problems with the Brinson approach when hedging is active 4.12 Calculating base and return premiums 4.13 The Karnosky-Singer attribution model 4.14 Running Karnosky-Singer attribution on an unhedged portfolio 5 Smoothing algorithms 5.1 Why returns do not combine neatly over time 5.2 The importance of internally consistent return contributions 5.3 Path-independence 5.4 Carino smoothing 5.5 Geometric smoothing 5.6 Foreign exchange return and smoothing 5.7 Summary Part 2 Fixed income attribution 6 An overview of fixed income risks 6.1 Introduction 6.2 What is a bond? 6.3 Pricing conventions 6.4 Maturity 6.5 Coupons 6.6 Discounted cash flows and net present value 6.7 Pricing a bond from its discounted cash flows 6.8 Bond yield and carry return 6.9 Prices and yields 6.10 Return of a bond 6.11 Credit effects 6.12 The three Cs 7 Yield curves in attribution 7.1 Introduction 7.2 Why interest rates vary by term 7.3 Interpolation 7.4 Par curves and zero curves 7.5 Credit spreads 8 Pricing, risk and the attribution equation 8.1 Introduction 8.2 Pricing securities from first principles 8.3 Calculating return using the perturbational equation 8.4 Residuals 8.5 Stand-alone portfolios Part 3 Sources of fixed income return 9 Carry return 9.1 Introduction 9.2 Carry-based investment strategies 9.3 Types of yield 9.4 Calculating carry return 9.5 Pros and cons of YTM 9.6 Decomposing carry 9.7 Which yield to use? 9.8 Decomposing carry return 9.9 Yield for non-bond securities 9.10 Using yield to maturity in attribution reports 10 Sovereign curve attribution 10.1 Introduction 10.2 Yield curve models 10.3 Parallel shift and modified duration, and why they matter 10.4 Measuring twist 10.5 Taxonomy of curve shifts 10.6 Sources of yield curve data 11 Sector and credit return 11.1 Credit spreads 11.2 Sectors and credit ratings 11.3 Building sector curves 11.4 Attribution using sector curves 11.5 Attribution on Euro bond portfolios 11.6 Attribution on credit portfolios 11.7 Credit attribution without a credit curve 12 Other security-specific sources of return 12.1 Paydown 12.2 Convexity 12.3 Rolldown 12.4 Liquidity return 13 Balanced attribution 13.1 Introduction 13.2 Calculating balanced attribution 14 Duration allocation attribution 14.1 Introduction 14.2 Return of a single fixed income security 14.3 Calculating duration returns 14.4 Discussion Part 4 Attribution on fixed income securities 15 Bonds 15.1 Introduction 15.2 Bond pricing formulae 15.3 Types of bonds 15.4 Repos 16 Money market securities 16.1 Introduction 16.2 Money market yield curves 16.3 Money market curve decomposition 16.4 Cash 16.5 Bank bills and discount securities 16.6 Accrual securities 16.7 Floating rate notes 16.8 Interest rate and credit risk 16.9 FRN types 16.10 Yields and discount margins 16.11 FRN durations 16.12 Decomposing the return of an FRN 16.13 Yield curve attribution 16.14 Attribution with complete data 16.15 Attribution with incomplete data 16.16 Treatment of FRNs in commercial systems 16.17 FRNs and securitisation 16.18 Currency forwards 16.19 Repurchase agreements (repos) 16.20 Money market benchmarks 17 Inflation-linked securities 17.1 Introduction 17.2 Overview of the inflation-linked bond market 17.3 What is an inflation-linked bond? 17.4 The Canadian model for inflation-linked debt 17.5 Inflation ratios 17.6 Real yields and nominal yields 17.7 Pricing an inflation-linked bond 17.8 Real yield term structure 17.9 Pricing an inflation-linked bond 17.10 Modified duration and return of inflation-linked gilts 17.11 Break-even yields in attribution 17.12 Inflation swaps 17.13 Practical considerations 18 Futures 18.1 Introduction 18.2 How futures work 18.3 Attribution on bond futures 18.4 Futures contracts on other fixed income securities 18.5 Heuristics for dealing with futures 19 Annuities and amortising securities 19.1 Introduction 19.2 Prepayments 19.3 Mortgage-backed securities 20 Swaps 20.1 Introduction 20.2 Two-leg swaps 20.3 Single-leg swaps 20.4 Modelling swaps 20.5 Types of swap 20.6 Credit default swaps 21 Options and callable bonds 21.1 Introduction 21.2 Measuring yield on bonds with embedded options 21.3 Optionality in practice 22 Collateralised and securitised debt 22.1 Introduction 22.2 Securitisation 22.3 Collateralised debt 22.4 Attribution on securitised debt Part 5 Attribution in practice 23 Popular attribution models 23.1 The Campisi model 23.2 Duration attribution 23.3 The Tim Lord model 23.4 Key rate attribution 23.5 Top-down attribution 24 Reporting 24.1 Treatment of residuals 24.2 Unattributed return Afterword Appendices Appendix A A summary of the Karnosky-Singer attribution model Appendix B Explicit pricing of an Frn Appendix C Attribution on Australian and new Zealand bond futures Appendix D Parametric and non-parametric yield curve models Appendix E Replicating the return of a hedged benchmark Appendix F Duration-weighted yields Appendix G Combining duration allocation returns Appendix H Sources of yield curve data Bibliography Index Mastering Attribution in Finance is a comprehensive guide to how attribution is used in equity and fixed income markets. As with all Mastering titles, this book is written by an expert in the field. The book: Presents a structure overview of attribution in finance Provides a complete mathematical toolkit, including all the necessary formulae Covers all the key models, such as The Campisi model, Duration attribution, the Tim Lord model, key rate attribution, top-down attribution, Karnosky-Singer attribution model, Parametric and non-parametric yield curve models, Brinson attribution Includes tricks and techniques for trading specific types of fixed income security The full text downloaded to your computer With eBooks you can: search for key concepts, words and phrases make highlights and notes as you study share your notes with friends eBooks are downloaded to your computer and accessible either offline through the Bookshelf (available as a free download), available online and also via the iPad and Android apps. Upon purchase, you'll gain instant access to this eBook. Time limit The eBooks products do not have an expiry date. You will continue to access your digital ebook products whilst you have your Bookshelf installed. __Mastering Attribution in Finance__ is a comprehensive guide to how attribution is used in equity and fixed income markets. Attribution in finance is a key investment and asset management process used in managed funds. A managed fund uses appropriate financial tools to make sure that the fund‘s value is maintained or increased. Attribution tools are used to analyse why a portfolio’s performance differs from a benchmark. The difference between the portfolio return and the benchmark return is known as the active return. As with all __Mastering__ titles, this book is written by an expert in the field. It will show you how to: * Understand how attribution is used in equity and fixed income markets * Improve your knowledge of the mathematics used in performance and attribution * Assess in greater detail the effects top-down attribution and attribution on specific types of fixed income security * Broaden your awareness of performance and return This book is a comprehensive guide to how attribution is used in equity and fixed income markets. As with all "Mastering "titles, this book is written by an expert in the field. The book: Presents a structure overview of attribution in finance Provides a complete mathematical toolkit, including all the necessary formulae Covers all the key models, such as The Campisi model, Duration attribution, the Tim Lord model, key rate attribution, top-down attribution, Karnosky-Singer attribution model, Parametric and non-parametric yield curve models, Brinson attribution Includes tricks and techniques for trading specific types of fixed income security