FIXED INCOME, CREDIT AND DERIVATIVES

This course covers valuation, pricing and forecasting of fixed income instruments and portfolios mainly, but not only, from an active fixed income management perspective. We will look at these markets from a "top-down" perspective, by computing the expected returns of fixed income asset classes and strategies. We will look at the same markets from a "bottom-up" perspective, by describing and pricing the most important fixed income cash and derivative instruments (fixed and floating rate bonds, repos, swaps and futures for trading interest rate, credit and inflation risk). . The course leverages the instructor has 30-year experience in financial innovation and automation in financial markets, as well as in reverse engineering and studying hedge fund strategies. As a consequence, this course is a strong complement to the more quantitative and theoretical course offered by the Department of Economics and Finance. Learning how Fixed Income markets and instruments work is critical for anybody pursuing a career in finance and banking, as interest rates are used to discount any kind of cash flow. The link between macroeconomics (monetary policy and public debt management) and fixed income markets is the bridge between macro people and finance people, but few people are able to link the two domains. This course will help students, especially those of you who are taking economics as their elective field to make this bridge, which is a rare skill on the job market. For the finance students, fixed income is a specialist market, with a number of niches and domains across instruments, strategies, and functions across the value chain of asset managers, issues, investment banks and regulatory agencies. We cover a number of these specific topics and new areas in the course, especially in the Topics section which will help you pursue specific career opportunities. The instructor has business experience in many of these areas and is currently part of the Research Team of Generali Investments, the leading fixed income asset manager in Italy. Guest lectures complement the instructor and give a broader perspective.as well as different viewpoints on the asset class.

This is basically a self-contained course with an industry practitioner oriented approach. Fixed income practice is however a data and theory intensive field, and the markets give immediate (and often not so positive) feedback to novel strategies and approaches. There is no presumption of preliminary knowledge of financial theory. Good proficiency in Excel, and some knowledge in macroeconomics and statistics are however useful. The instructor recommends course attendance and participation.

• Knowledge and understanding: Learning about sources of expected returns and how to implement them by appropriate portfolio construction. “Respect the data”, was the ,main teaching from My PhD Advispr, Prof. S.J. Brown, who lectured on Financial Econometrics at NYU Stern at the time. . . • Making judgements: The course is based on humility, independent judgement and forecasting. Learn to mix theory and data in approaching problems. Premium to thinking and problem solving rather than content memorization or blind trust in black boxes and algos. . • Teamwork. : Most competition in the real word is among team, not among individuals. Further, most professional knowledge and understanding comes from Team based learning by doing. This is the goal of the group work. We implement most concepts into liquid bond portfolios and look at how exogenous/forecasted variables impact portfolio performance. •Communications Skills: Group work to be presented via video. Content in PPT and Excel.

The course is divided into four parts. • The first part of the course (four weeks) covers the study of the shape of the Yield Curve and Bond Risk Premia in treasury market. After reviewing basic fixed income concepts, we look at the relation between rate expectations, bond risk premia, convexity and the shape of the Yield curve. We also discuss active management of treasuries, which is the backbone for the group work assignment. We also cover the most important fixed income instruments such as zero coupon bonds, strips, repos, swaps and bond and money market future. • The second part (two weeks) covers the determinants of Credit Risk Premia in sovereign and non-sovereign markets, active management of credit risk and debt restructuring, with a main focus on sovereign debt). • The third part of the course (three weeks) is on Trading and Macro Strategies in fixed income markets inclusive of climate risk related strategies. • The last part of the course covers special topics presented by guests from MEF, Bank of Italy, Generali Investments and other AM Guest Lecture speakers and dates are tentative, but most of these guests already lectured in previous versions of this course.

The course textbooks are: • A. Ilmanen (2011) “Expected Returns: An Investor's Guide to Harvesting Market Rewards (ER) by Antti Ilmanen, John Wiley and Sons, 2011. • B. Tuckman and A.Serrat (2011) “Fixed Income Securities. Tools for Today’s Markets”, Third Edition, 2011, Wiley Finance (FIS) • A. Ilmanen, Liquid Asset Class Premia, Chapter 4 of "Investing amid low Expected Returns", Wiley 2022. All the Teaching Materials are available on this Course website (password protected). Non registered students and other people willing to access the material can send me an e-mail explaining why they need access) • For each class, I will send you an e-mail with the relevant materials, Excel spreadsheet for Fixed Income Istrument pricing and quite valuable Bloomberg sourced data data in excel format

Lectures and presentations on relevant empirical issues. Group Work Learning by doing and teamwork. Up to four Guest presentations. See the Topics classes. Guests will come from MEF, Bank of Italy, General Investment and other AM/Inverstment Banks.

The assessment method is consistent with the teaching methods in combining different approaches. • Final Exam (40% of the final grade). Open ended questions on the main concepts covered in each class (usually 3-4 concepts per class). • Mandatory team project (40% of the final grade). A team project on active asset management of bonds will be run during the course. Group work to be presented via video. _ Class Participation and Topics Presentation Active Participation (20%) of the grade. . The instructor reserves the right to waive the group exercise or to postpone the content of the midterm exam to the date of the final exam for those students who have a valid reason to ask for it (e.g, working students, Double Degree Program students; Erasmus students , etc.). Students may take an additional oral examination worth -2/+2 on proposed grade (NB: +2 only for exceptional performance + relatively low starting grade)

• Willingness to do some original/research work. • Focus on the empirical project rather than literature survey. • Good knowledge of Excel. Look at past dissertations here: https://tesi.luiss.it/view/supervisor/Cybo-Ottone=3AAlberto_Adolfo=3A=3A.html