Curve Factors

For overview of factor analysis, start here.

Our default set of factors contains three curve factors,

• Curve Shift

• Curve Tilt

• Curve Twist

As with our other factors, the factor exposure for a curve factor is based on a regression of the portfolio backcast returns against a factor return series. For the curve factors, the factor returns series is based on changes in the risk-free yield curve. More specifically,

• Curve Shift is the change in the average of the 2-, 5-, 10-, and 20-year points;

• Curve Tilt is the change in the 10-year minus the 2-year;

• Curve Twist is the change in the 5-year minus the average of the 2- and 10-year points.

So, for example, if your beta exposure to Curve Shift is 123%, and the yield curve shifted up by 0.20%, then we would expect your portfolio to make 123% x 0.20% = 0.246%.

Similarly, if your exposure to Curve Tilt was 456%, and the spread between the 10-year and 2-year increased by 0.10%, we would expect your portfolio to make 456% x 0.10% = 0.456%.

Relationship to Duration and DV01

The beta exposure to the Curve Shift factor is related to, but not the same duration or DV01. Duration and DV01 are derived from pricing formulas. The Curve Shift factor exposure is based on regression analysis.

For risk-free bonds, both statistics will give similar answers to the question, “what would happen to the value of my portfolio if the yield curve shifted up or down by 1bp?” Be careful, the curve shift factor will have the opposite sign of DV01 and duration. If Curve Shift is positive, this means a shift up in the yield curve will increase the value of your portfolio, which is equivalent to negative duration or DV01.

Because the Curve Shift factor exposure is based on regression analysis, any security can have an exposure to the factor, not just fixed income securities. So, for example, if you own some stocks, and, in the past, when interest rates increased, the stocks declined in value, the Curve Shift beta exposure for the stocks would be negative.