What Is Horizontal Analysis?

The level analysis believes that the yield of a bond in any given holding period depends to some extent on the beginning and end prices of the bond and the coupon rate. As both the opening price and the coupon rate are known, the level analysis mainly focuses on the estimation of the closing bond price, and thus determines whether the current market price is high or low. This is because, relative to a given period-end price estimate, if the current price of a bond is relatively low, its expected rate of return is relatively high; on the other hand, if the current price of a bond is relatively high, then Its expected rate of return is relatively low.

Level analysis

Horizon Analysis, a method for analyzing the returns of securities.

Level analysis is a bond portfolio management strategy based on future interest rate expectations. The main form is called Interest Rate Expectations Strategies. Under this strategy, bond investors adjust their bond asset portfolios based on their expectations of future interest rate levels to keep them sensitive to changes in interest rates. Because duration is an important indicator of sensitivity to interest rate changes, this means that if the expected interest rate rises, the duration of the bond portfolio should be shortened; if the expected interest rate falls, the duration of the bond portfolio should be increased.

For asset managers who use the bond index as an evaluation benchmark, when the expected interest rate decreases, the correlation between the duration of the investment portfolio and the benchmark index will increase; conversely, when the expected interest rate rises, the duration of the investment portfolio will be shortened . If the investor does not make any provision for the gap between the duration of the portfolio and the duration of the benchmark index, the asset manager has an inherent motivation to gamble on interest rate changes. Adjusting the duration of the bond investment portfolio in accordance with the expectations of interest rates will likely bring outstanding performance to asset managers and may cause greater losses. In order to obtain possible excess returns, asset managers have the incentive to make their own expectations of bond rates, even if such expectations are sometimes wrong.

Under the interest rate expectation strategy, the key point is whether it can accurately predict the future interest rate level. Some academic papers point out that interest rates are difficult to accurately predict, and further inferred that under the interest rate anticipation strategy, risk-adjusted excess returns are difficult to sustain.