Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: During recent years butterfly barbells have been used actively as investment strategies. Such barbells are

constructed in order to obtain a yield pick-up and at the same time to be risk neutral against a change in

the slope of the yield curve and/or a parallel shift in the yield curve. However, empirically the yield curve

may change in an unanticipated way, which can have drastic consequences for the outcome of the

strategy. This paper addresses some of the various risk factors characterizing butterfly barbells, and it is

shown that a potential yield pick-up is not the result of an arbitrage possibility, but rather it reflects the

actual shape of the yield curve. Furthermore, in a dynamic setting we show that the yield pick-up gives

false information about the holding period returns, which the investor can expect to obtain.

Keywords: Finance; Bonds; Portfolio; Risk diversitification

22 pages, May 9, 2002

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