Financial Engineering Seminar Series: "Decomposing Long Bond Returns" - Liuren Wu | Hanlon Financial Systems Center

Financial Engineering Seminar Series: "Decomposing Long Bond Returns" - Liuren Wu

Financial Engineering Seminar Series: "Decomposing Long Bond Returns" - Liuren Wu

Event Location: 
EAS 230, Stevens Institute of Technology
Event Time: 
Thursday, March 9, 2017 - 5:00pm to 6:00pm

Liuren Wu

Wollman Distinguished Professor of Finance,  

Zicklin School of Business
Baruch College - City University of New York

"Decomposing Long Bond Returns"

ABSTRACT:

Long-term interest rates show substantial volatility, but their movements are extremely difficult to predict. Such behaviors present challenges to traditional term structure models, which strive to determine the behavior of the whole yield curve from the dynamics of the short rate. To price long rates, such models face the impossible task of projecting short rates into the fast distant future. This paper introduces a new theoretical framework that determines the fair value of each rate based on its own near-term dynamics, thus allowing one to analyze returns on a particular bond or bond portfolio based on the recent behavior of its own yield without making any projections about future short rate movements. The framework is particularly suited for analyze long-bond returns, and allows one to extract bond risk premium without predicting future long rate movements. The extracted bond risk premium shows strong predictability on future bond returns.

BIO:

 Liuren Wu is the Wollman Distinguished Professor of Finance at Zicklin School of Business, Baruch College, the City University of New York. Professor Wu's research interest include option pricing, credit risk and term structure modeling, market microstructure, monetary economics, and general asset pricing. During the past decade, Professor Wu has published over 40 articles, many of them in top finance journals such as the Journal of Finance, the Journal of Financial Economics, Review of Financial Studies, the Journal of Financial and Quantitative Analysis, Management Science, and Journal of Monetary Economics. Professor Wu has also worked extensively in the finance industry, including consulting positions at Bloomberg, Morgan Stanley, Royal Bank of Canada, and several fixed income, equity, and equity options hedge funds and market making firms. In the process, Professor Wu has developed data-analytic systems, statistical arbitrage strategies, risk management procedures, and quantitative models for pricing fixed income and equity derivative securities.