TY - JOUR T1 - Replicating Bond Indices with Liquid Derivatives JF - The Journal of Fixed Income SP - 7 LP - 19 DO - 10.3905/jfi.2006.627827 VL - 15 IS - 4 AU - Lev Dynkin AU - Anthony Gould AU - Vadim Konstantinovsky Y1 - 2006/03/31 UR - https://pm-research.com/content/15/4/7.abstract N2 - The scarcity of return in the capital market environment of the past few years has left investors looking for alternative ways to improve performance. Rising demand for portable alpha strategies largely accounts for the increased interest in derivatives replication of fixed-income indices. Because cash is usually deployed in the alpha strategy, the beta (often a fixed-income market return) has to be generated by unfunded derivative exposures. In a historical simulation study of replicating the 10,000-bond Lehman Brothers Global Aggregate Index, we show that strategies employing liquid derivative instruments in several markets produce tracking error volatility as low as 6–9 bp/month. Based on the results of this study, and to satisfy demand for such strategies, Lehman Brothers launched RBISM (Replicating Bond Index) baskets which pay the return of various strategies for replicating bond indices.TOPICS: Derivatives, performance measurement ER -