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does it make sense to regress the changes in a bonds YTM against changes in the YTM of a bond index to get som measure of a bonds beta?

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The beta concept is rather easy for stocks, but more complex for bonds. We know that stocks tend to grow long term and rise in price, which compensates investors for their risk. So generally investors want a positive beta to the stock market, to capture this long-run price appreciation tendency. For bonds, there is no long-term appreciation observable and the main source of risk is not a bond index, but interest rate risk, therefore no one uses betas to hedge bonds, but duration and convexitiy. (if its about hedging: Alternatively regress your (portfolio) bond return against the return of a bond-futures contract as they are more liquid to e.g. conduct a minimum variance hedge. Also it is important to note that if you do such a regression to take comparabale bonds in terms of credit rating, i.e. if you hedge a corporate bond portfolio with a gilt futures, you are exposed to an increase in the credit spread.)

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  • $\begingroup$ Thanks, the thing is that we have been given data for generic bond series for different maturities. We are then supposed to take the average yield of all the maturities each day as the benchmark and find the beta for each maturity in terms of the benchmark. This is a bachelor course so pretty basic, but i wonder if this is a OK way to do it. We are trying to test the betting against beta strategy. $\endgroup$ – TheNarsisisst Apr 3 '17 at 20:42
  • $\begingroup$ @TheNarsisisst As a general rule, if a professor wants you to do it, then do it. More generally, I disagree with some parts of this answer. There's nothing inherently wrong with regressing changes in bond yields against the YTM of an index, though there are complexities to be aware of. $\endgroup$ – John May 3 '17 at 20:11
  • $\begingroup$ But the question was "does it make sense". It's a fine answer to that question. $\endgroup$ – Drew Saunders Aug 1 '17 at 22:12
  • $\begingroup$ What about no hedging purposes? As instance, consider getting Jensen's $\alpha$ regressing price variations of each bond in an ETF such as IHYG against that ETF's price variations. Aside from hedging a basket of bonds by selling the ETF, you could also detect bonds eligible for trend following or mean reverting... $\endgroup$ – Lisa Ann Aug 2 '17 at 7:08

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