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Fixed Income Securities as a Hedge against Equity Market Downside

Bengtsson, Timmie LU (2022) NEKH01 20221
Department of Economics
Abstract (Swedish)
Investors are constantly searching for ways to protect their wealth, ideally without losing out on long-term returns. To achieve this, some investors choose to diversify their equity portfolios with fixed income assets, believing they can protect their portfolios from drawdowns. However, the current literature is divided on the effectiveness of fixed income assets as a shock-absorber during severe equity drawdowns. This thesis analyzes sub-classes of fixed income assets to understand if they mitigate downside risk as part of a multi-asset equity portfolio. The results of this thesis show that investors cannot rely on simple heuristics to decide whether to include fixed income or not for this purpose. While some findings support the... (More)
Investors are constantly searching for ways to protect their wealth, ideally without losing out on long-term returns. To achieve this, some investors choose to diversify their equity portfolios with fixed income assets, believing they can protect their portfolios from drawdowns. However, the current literature is divided on the effectiveness of fixed income assets as a shock-absorber during severe equity drawdowns. This thesis analyzes sub-classes of fixed income assets to understand if they mitigate downside risk as part of a multi-asset equity portfolio. The results of this thesis show that investors cannot rely on simple heuristics to decide whether to include fixed income or not for this purpose. While some findings support the effectiveness of fixed income, the results are divided. Overall, this paper supports the claim that fixed income can act as a shock-absorber for equity portfolios, in particular government bonds and some investment-grade corporate bonds.

This thesis was written in collaboration with Citroneer AB as the concluding part of a bachelor’s degree at Lund University School of Economics and Management. (Less)
Please use this url to cite or link to this publication:
author
Bengtsson, Timmie LU
supervisor
organization
course
NEKH01 20221
year
type
M2 - Bachelor Degree
subject
keywords
Fixed Income, Financial Markets, Hedge, Portfolio, Downside Risk, Value-at-Risk, Expected Shortfall, Extreme Value Theory, Kernel Density Estimation
language
English
id
9101728
date added to LUP
2022-11-14 08:06:19
date last changed
2022-11-14 08:06:19
@misc{9101728,
  abstract     = {{Investors are constantly searching for ways to protect their wealth, ideally without losing out on long-term returns. To achieve this, some investors choose to diversify their equity portfolios with fixed income assets, believing they can protect their portfolios from drawdowns. However, the current literature is divided on the effectiveness of fixed income assets as a shock-absorber during severe equity drawdowns. This thesis analyzes sub-classes of fixed income assets to understand if they mitigate downside risk as part of a multi-asset equity portfolio. The results of this thesis show that investors cannot rely on simple heuristics to decide whether to include fixed income or not for this purpose. While some findings support the effectiveness of fixed income, the results are divided. Overall, this paper supports the claim that fixed income can act as a shock-absorber for equity portfolios, in particular government bonds and some investment-grade corporate bonds.

This thesis was written in collaboration with Citroneer AB as the concluding part of a bachelor’s degree at Lund University School of Economics and Management.}},
  author       = {{Bengtsson, Timmie}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Fixed Income Securities as a Hedge against Equity Market Downside}},
  year         = {{2022}},
}