The Cost Effectiveness of the UK's Sovereign Debt Portfolio*

doi:10.1111/j.1468-0084.2005.00128.x

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Wiley InterScience

Oxford Bulletin of Economics and Statistics

Volume 67 Issue 4, Pages 467 - 495

Published Online: 22 Jul 2005

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The Cost Effectiveness of the UK's Sovereign Debt Portfolio*

Patrick J. Coe†, M. Hashem Pesaran‡ and Shaun P. Vahey§

†Department of Economics, Carleton University, Ottawa, ON, Canada (e-mail: patrick_coe@carleton.ca)
‡Faculty of Economics, Cambridge University, Cambridge, UK and Department of Economics, University of Southern California, Los Angeles, CA, USA (e-mail: mhp1@econ.cam.ac.uk)
§Reserve Bank of New Zealand, The Terrace, Wellington, New Zealand (e-mail: shaun.vahey@rbnz.govt.nz)

*We would like to thank Andreas Pick for valuable research assistance and seminar participants at the HM Treasury and the UK Debt Management Office (DMO) for useful comments. The bond data used in this study were supplied by the UK DMO; we are particularly grateful to Mark Deacon for his helpful responses to our data enquiries. The bond data can be downloaded from http://www.econ.cam.ac.uk/dae/research/debt/ (accessed 4 February 2005). Partial financial support from the ESRC (Research Grant no. L38251021) is acknowledged gratefully. The views expressed in this paper are the authors' own and do not necessarily reflect those of the Reserve Bank of New Zealand.

KEYWORDS

E17 • E44 • G12 • H63

ABSTRACT

This paper provides a recursive empirical analysis of the scope for cost minimization in public debt management when the debt manager faces a given short-term interest rate dictated by monetary policy as well as risk and market impact constraints. It simulates the 'real-time' interest costs of alternative portfolios for UK government debt between April 1985 and March 2000. These portfolios are constructed using forecasts of return spreads based on a recursive modelling procedure. While we find statistically significant evidence of predictability, the interest cost savings are quite small when portfolio shares are constrained to lie within historical bounds.

Final Manuscript Received: November 2004

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-0084.2005.00128.x About DOI