Michael Christensen: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: During recent years butterfly barbells have been used actively as investment strategies. Such barbells are constructed in order to obtain a yield pick-up and at the same time to be risk neutral against a change in the slope of the yield curve and/or a parallel shift in the yield curve. However, empirically the yield curve may change in an unanticipated way, which can have drastic consequences for the outcome of the strategy. This paper addresses some of the various risk factors characterizing butterfly barbells, and it is shown that a potential yield pick-up is not the result of an arbitrage possibility, but rather it reflects the actual shape of the yield curve. Furthermore, in a dynamic setting we show that the yield pick-up gives false information about the holding period returns, which the investor can expect to obtain.
22 pages, May 9, 2002
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