Volume 29 Number 9 2003 9

Measuring Risk in the Greek Bond Market An

Alternative Approach
by Dr Panayiotis G. Artikis, Investment Director, Agricultural Bank of Greece, Mutual
Funds

Abstract

The capital asset pricing model, using as an approximation of the market portfolio the
General Index of the Athens Stock Exchange, has been applied extensively to measure
the risk of the bond mutual funds operating in the Greek financial market. This article ar-
gues that the General Index of the Athens Stock Exchange cannot approximate the market
portfolio and proposes an alternative index. In turn, the proposed Bond Index is tested us-
ing the daily returns of the bond mutual funds operating in the Greek financial market.
The proposed index proved to be a very good approximation of the Greek bond market.
Besides, this index approximates the market portfolio much better than General Index of
the Athens Stock Exchange.

Key words: Capital asset pricing model, mutual funds, bond, bond index

1. Introduction

The capital asset pricing model using as an approximation of the market portfolio the
General Index of the Athens Stock Exchange (ASE) has been applied extensively to
measure the risk of the bond mutual funds operating in the Greek financial market.

Bearing in mind that the bond mutual funds operating in the Greek financial market
have to invest their capital in bonds at a minimum of 65%, while they allocate the remain-
ing capital between stocks and bank deposits (maximum capital in stocks 10%), the pres-
ent article argues that the General Index of the ASE cannot approximate the market
portfolio.

This argument gains ground after the opening of the Greek secondary bond market
on 15th March 1999. Since then the bond mutual funds operating in the Greek financial
market have to evaluate their portfolios on the basis of market values (mark to market). In
other words, since 15-3-1999 the risk of the portfolios of the bond mutual funds is a func-
tion of the changes in the market prices of their bonds.

In such a case, the index used to approximate the market portfolio (Greek bond
market) in measuring bond mutual funds systematic risk must reflect the changes in mar-
ket prices of the bonds that are included in their portfolios.

Put another way, the article proposes an index that should be used whenever the
capital asset pricing model is applied to measure the systematic risk of the bond mutual
funds operating in the Greek financial market. This index is different from the General
Index of the ASE, which might be appropriate in measuring the systematic risk of stock
portfolios, but it is rather misleading in the case of bond portfolios.
Managerial Finance 10

2. The Proposed Index

In attempting to develop an index as representative as possible to the market portfolio ex-

isting in the Greek bond market, the present research took into account similar indices
constructed by well-known international financial organizations like Salomon Smith Bar-
ney (1998).

The proposed index is the weighted average of all bond issues which satisfy the fol-
lowing conditions: (a) they are bond that have been issued by the Greek state, (b) they
provide either fixed or floating interest rate, (c) the amount of outstanding bonds should
be greater than 200 billion drachmas in order to overcome the problem of thin trading,
and (d) they should be outstanding during the whole period under consideration.

The procedure for the development of the proposed index has been divided into
five steps. First, identification of the bond issues that satisfy the above four conditions.
Second, the weight of each issue is determined on the basis of the amount of the issue that
was outstanding. Third, as the base date of the index has been chosen the date when the
secondary bond market started operating in Greece, 15th March 1999. Fourth, the initial
price of the index (base date) has been determined at the level of 1,000 units. Six, the
weights of the index are adjusted after every re-opening of an existing bond issue.

The daily price of the index is calculated as follows:

Total value of the issues included in the index

Index daily price =
Index coefficient

For example, let us assume that the bond issues, their prices, outstanding amounts
(in billion drachmas), and their values that are included in the proposed index on 15th
March 1999 are as follows:

Issue Price Outstanding Value

Amount
Treasury bonds, 7 years, 14.70% 105.02 830 87,166
Treasury bonds, 10 years, 6.30% 102.86 660 67,888
Treasury bonds, 7 years, 12.50% 105.18 603 63,423
Treasury bonds, 15 years, 6.50% 102.86 600 61,716
Treasury bonds, 5 years, 6.60% 101.71 240 24,410
Total 2,933 304,603

Recalling that the initial price of the index has been determined at 1,000 units, the
index coefficient on 15th March 1999 is calculated as follows using the above mentioned
formula:
Volume 29 Number 9 2003 11

Now let us assume that the prices of the second, third, and fourth issue change on
16th March 1999. In that case the price of the index on 16th March 1999 is calculated as
follows:
Issue Price Outstanding Value
Amount
Treasury bonds, 7 years, 14.70% 105.02 830 87,166
Treasury bonds, 10 years, 6.30% 102.96 660 67,954
Treasury bonds, 7 years, 12.50% 105.13 603 63,393
Treasury bonds, 15 years, 6.50% 102.96 600 61,776
Treasury bonds, 5 years, 6.60% 101.71 240 24,410
Total 2,933 304,669

304,669
Index daily price = = 1000216
, .
304,603
The change in index from 15th March, 1999 to 16th March, 1999 is:
Index price 16 - 3 -1999 - Index price 15 - 3 -1999 1000216
, . - 1000
,
= =.0216%
Index price 15 - 3 -1999 1000
,
At this point let assume that on 16th March 1999 the outstanding amount of the issue
“treasury bonds, 5 years, 6.60%” increased by 300 billion drachmas. In this case the new
index coefficient is calculated as follows:
304,669 + 300
Index coefficient = = 304903
.
1000216
, .
The proposed Bond Index that has been developed using the procedure described
above shows a decreasing trend over the period, 15-3-1999 to 13-9-1999 (Figure
opposite). This makes sense since in the same period the General Index of the ASE
showed a extremely upward trend.

3. Capital Asset Pricing Model

The capital asset pricing model with independent variable the proposed Bond Index is as
follows (Elton, and Gruber 1995):

Ri = ai + biRbi + ei
where,

Ri = Return of bond mutual fund i

ai = Return of bond mutual fund i when the market is constant
bi = Beta coefficient of mutual fund i
Rbi = Return of bond index (market portfolio)
Managerial Finance 12

1020

1010

1000

990

980

970

960
9

9
199

199

199

199

199

199

199

199

199

199

199

199

199

199
03/

03/

04/

04/

05/

05/

06/

06/

07/

07/

08/

08/

08/

09/
15/

29/

12/

26/

10/

24/

07/

21/

05/

19/

02/

16/

30/

13/
ei = Non systematic factors that are independent from the market fluctuations
The capital asset pricing model with independent variable the General Index of the
ASE is as follows (Elton, and Gruber 1995):
Ri = ai + biRsi + ei
where,
Rsi = Return of stock index (market portfolio)
The return of the bond mutual funds per unit was calculated as follows:
NAV t - NAV t -1
Rt =
NAV t -1
where,
Rt = Return of bond mutual fund before taxes
NAVt = Net asset value per unit during the period t
NAVt-1 = Net asset value per unit during the period t-1
It should be noted that during the evaluation period the sample bond mutual funds
did not pay dividends. Also, the tax rate is same for all bond mutual funds operating in
Greece; therefore, there is no reason to compute the return after taxes.
4. Evaluation
The sample includes all the bond mutual funds operating in the Greek financial market
over the period 15/3/1999 – 15/9/1999. These bond mutual funds amount to 42. For each
of these 42 bond mutual funds, daily data where collected.
Volume 29 Number 9 2003 13

The regression was carried out with the Econometric Views (1997-1999), while the
results were tested for autocorrelation and heteroscedastisity with the methods of
Durbin-Watson (Anderson, Sweeney, and Williams 1999), and White respectively (Sal-
vatore 1996).
Combining the information presented in Tables 1 and 2 it becomes apparent that
thirty-five mutual funds had both coefficient of determination higher or at least equal to
10 per cent, and beta coefficient statistically significant at 5 per cent level of significance.
This means that the performance of these mutual funds is not only affected, but also can
be explained to a satisfactory level by the movements in the Bond Index. These mutual
funds are shown in decreasing order on the basis of the coefficient of determination in Ta-
ble 1. From the remaining seven mutual funds, five had statistically significant beta coef-
ficient at 5 per cent level of significance, while all of them had coefficient of
determination less than 10 per cent.
For example, in the case of the mutual fund LAIKI TELESIS changes in return are
explained by 89.40 per cent from the changes in the Bond Index, while the remaining
10.60 per cent of the changes are due to other factors that are not included in the model.
Besides, increase (decrease) in the Bond Index by 1 causes increase (decrease) in the re-
turn of the LAIKI TELESIS mutual fund by 1.769.
Eight sample mutual funds are expected to achieve beta coefficient higher than 1,
while thirty-four lower than 1. This means that from the above thirty-five mutual funds
eight are aggressive, and twenty-seven are defensive in relation to the Bond Index. The
sample mutual funds in decreasing order on the basis of beta coefficient are shown in Ta-
ble 2.
Forty mutual funds have alpha coefficient statistically significant at 5 per cent level
of significance (Table 3). Put another way, only two mutual funds have alpha coefficient
statistically equal to zero as it is assumed by the capital asset price in model.
In relation to the General Index of the ASE it appears that only nineteen mutual
funds had adjusted coefficient of determination higher or at least equal to 10 per cent.
This means that the performance of these mutual funds can be explained to a satisfactory
level by the movements in the General Index of the ASE. These mutual funds are shown
in decreasing order on the basis of the coefficient of determination in Table 4.
Also in relation to the General Index of the ASE fifteen mutual funds had beta coef-
ficient statistically not significant neither at 5 per cent level of significance nor at 10 per
cent level of significance. The corresponding mutual funds for alpha coefficient are nine-
teen.
Table 5 below shows a comparison of the adjusted R2 resulted from the proposed
Bond Index with that from the General Index of the ASE. As it can be seen the explana-
tory capacity of the General Index of the ASE exceeds slightly that of the Bond Index in
eight mutual funds only.
5. Conclusions
Bearing in mind that the bond mutual funds operating in the Greek financial market have
to invest their capital in bonds at a minimum of 65%, and the opening of the secondary
Managerial Finance 14

bond market in Greece on 15th March 1999, the present article proposes a Bond Index for
the measurement of the systematic risk of the bond mutual funds that can approximate the
market portfolio, in this case the Greek bond market.

In turn the article tested this Bond Index on the basis of relative daily data from the
period 15-3-1999 to 15-9-1999. The index proved to be a very good approximation of the
Greek bond market. Besides, the Bond Index appeared to approximate the market portfo-
lio much closer than the General Index of the Athens Stock Exchange.

However, taking into account the short period that has pasted since the opening of
the Greek secondary bond market and the resulted limited number of daily returns of the
bond mutual funds operating in Greece, the article suggests the proposed Bond Index to
be re-evaluated on the basis of more data.
Volume 29 Number 9 2003 15

References
Anderson D. R., D. J. Sweeney, T. A. Williams (1999), Statistics for Business and Eco-
nomics, South- Western College Publishing, 7th Edition, USA, pp.712-718.
Elton E. J., M. J. Gruber (1995), Modern Portfolio Theory and Investment Analysis, John
Willey and Sons Inc., 5th Edition, USA, pp. 128-140.
QMS, EViews 3.1, 1997 – 1999.
Salomon Smith Barney (1998), Salomon Smith Barney Global Index Catalog, February,
USA, pp 4-8 and 25-31.
Salvatore D. (1996), Managerial Economics in a Global Economy, McGraw – Hill, Inc.,
3rd Edition, USA, pp.151-153.
Managerial Finance 16

TABLE 1
BOND MUTUAL FUNDS BASED ON DETERMINATION COEFFICIENT
(BOND INDEX)
R2 Adjusted R2 Durbin Watson
LAIKI TELESIS Income Bond Fund .894 .893 2.08
BARCLAYS Bond Fund .822 .819 2.14
ATE Income & Growth .821 .818 2.05
ALLIANZ Fixed Income .800 .798 2.09
EGNATIA – MYCENEA Fixed Income .769 .767 2.11
DELPHI Bond Fund .735 .733 2.12
GENERAL Bond Fund .723 .719 2.00
CYPRUS Bond Fund .722 .720 2.27
ALICO EUROBANK Bond Fund .721 .719 2.17
ATE Income Bond Fund .703 .698 1.92
IONIKI Income .654 .652 2.09
ABN AMRO Bond Fund .633 .630 2.10
DELOS Income .626 .623 2.24
ALLIANZ PLUS Bond Fund .573 .569 1.95
INTERAMERICAN Fixed .544 .540 1.76
ALPHA TRUST Bond Fund .535 .528 2.04
INTERAMERICAN Mikto .524 .516 1.99
ATHINON Bond Fund .516 .508 1.89
KOSMOS INCOME .509 .505 2.13
ERGASIAS Fixed Bond Fund .504 .500 1.83
CITI FUND INCOME .496 .491 1.94
DORIKI Bond Fund .433 .423 1.99
VERGINA Fixed Income .404 .400 1.73
MIDLAND Income Bond Fund .394 .384 2.07
INTERNATIONAL Long Term Bond Fund .389 .379 1.96
ALPHA TRUST Income .375 .370 2.04
XIOS Bond Fund .280 .268 2.36
HERMES Income Bond Fund .233 .227 1.86
POSIDON Bond Fund .231 .206 1.89
METROLIFE Income Bond Fund .206 .200 1.77
EUROPAIKI PISTI Bond Fund .173 .159 1.98
ASPIS Bond Fund .119 .112 2.09
ALPHA Bond Fund .118 .110 2.02
INTERAMERICAN Long Term Bond Fund .114 .107 1.86
CRETAFUND Bond Fund .105 .090 2.01
INTERNATIONAL Bond Fund .084 .077 2.08
IONIKI Life Fixed Income .076 .069 2.12
ATE Capital & Income .069 .062 1.97
ALPHA Income Bond Fund .065 .057 2.02
BETA Bond Fund .049 .041 2.23
ATTIKI Income Bond Fund .046 .038 1.69
IONIKI Euro – Greek Bond Fund .010 .002 2.29
Volume 29 Number 9 2003 17

TABLE 2
BOND MUTUAL FUNDS BASED ON BETA COEFFICIENT
(BOND INDEX)
b Standard Error t(b)
LAIKI TELESIS Income Bond Fund 1.769 .055 32.13
DELPHI Bond Fund 1.537 .084 18.04
ALLIANZ PLUS Bond Fund 1.508 .118 12.79
ALLIANZ Fixed Income 1.444 .065 22.07
EGNATIA – MYCENEA Fixed Income 1.337 .066 20.16
CYPRUS Bond Fund 1.319 .074 17.79
INTERNATIONAL Bond Fund 1.304 .389 3.35
BARCLAYS Bond Fund 1.090 .047 23.27
IONIKI Income .988 .065 15.20
ALICO EUROBANK Bond Fund .944 .053 17.76
GENERAL Bond Fund .915 .049 18.62
INTERAMERICAN Mikto .858 .076 11.27
ABN AMRO Bond Fund .857 .059 14.50
KOSMOS INCOME .809 .072 11.24
VERGINA Fixed Income .755 .083 9.10
XIOS Bond Fund .750 .235 3.19
INTERNATIONAL Long Term Bond Fund .711 .092 7.73
ALPHA TRUST Bond Fund .707 .067 10.57
ATE Income & Growth .684 .026 25.81
ALPHA TRUST Income .670 .078 8.56
POSIDON Bond Fund .656 .137 4.77
MIDLAND Income Bond Fund .640 .073 8.79
ATHINON Bond Fund .583 .056 10.36
ATE Income Bond Fund .580 .032 18.32
DELOS Income .563 .039 14.29
DORIKI Bond Fund .512 .058 8.81
ERGASIAS Fixed Bond Fund .481 .043 11.12
ASPIS Bond Fund .415 .102 4.06
METROLIFE Income Bond Fund .413 .073 5.63
BETA Bond Fund .406 .162 2.50
HERMES Income Bond Fund .377 .062 6.08
INTERAMERICAN Fixed .253 .021 12.05
CITI FUND INCOME .232 .021 10.94
EUROPAIKI PISTI Bond Fund .229 .060 3.84
ATTIKI Income Bond Fund .223 .092 2.41
ALPHA Bond Fund .142 .035 4.03
CRETAFUND Bond Fund .137 .078 1.75
IONIKI Life Fixed Income .091 .029 3.17
ATE Capital & Income .079 .026 3.01
INTERAMERICAN Long Term Bond Fund .070 .018 3.96
ALPHA Income .065 .022 2.91
IONIKI Euro – Greek Bond Fund -.010 .009 -1.10
Managerial Finance 18

TABLE 3
BOND MUTUAL FUNDS BASED ON ALPHA COEFFICIENT
(BOND INDEX)
a Standard Error t(a)
INTERNATIONAL Bond Fund .00196 .00082 2.39
ATTIKI Income Bond Fund .00132 .00019 6.80
BETA Bond Fund .00126 .00034 3.69
MIDLAND Income Bond Fund .00121 .00020 5.99
ALPHA TRUST Income .00100 .00017 6.08
INTERNATIONAL Long Term Bond Fund .00099 .00027 3.63
CRETAFUND Bond Fund .00087 .00023 3.75
POSIDON Bond Fund .00084 .00033 2.58
EUROPAIKI PISTI Bond Fund .00084 .00017 5.10
METROLIFE Income Bond Fund .00080 .00015 5.19
GENERAL Bond Fund .00078 .00009 8.83
DORIKI Bond Fund .00074 .00016 4.51
ASPIS Bond Fund .00073 .00022 3.39
INTERAMERICAN Mikto .00072 .00019 3.71
ABN AMRO Bond Fund .00072 .00012 5.78
ALLIANZ PLUS Bond Fund .00070 .00025 2.82
BARCLAYS Bond Fund .00070 .00013 5.31
ALPHA TRUST Bond Fund .00070 .00020 3.58
HERMES Income Bond Fund .00067 .00013 5.15
ATHINON Bond Fund .00066 .00016 4.10
IONIKI Income .00063 .00014 4.60
VERGINA Fixed Income .00062 .00017 3.57
XIOS Bond Fund .00060 .00039 1.53
KOSMOS INCOME .00058 .00015 3.81
ERGASIAS Fixed Bond Fund .00058 .00009 6.38
CYPRUS Bond Fund .00048 .00016 3,08
DELOS Income .00045 .00008 5.36
ALLIANZ Fixed Income .00044 .00014 3.20
INTERAMERICAN Fixed .00044 .00004 9.87
EGNATIA – MYCENEA Fixed Income .00043 .00014 3.08
ALPHA Bond Fund .00043 .00007 5.84
ALPHA Income .00041 .00005 8.64
ALICO EUROBANK Bond Fund .00039 .00011 3.46
IONIKI Life Fixed Income .00039 .00006 6.51
ATE Income Bond Fund .00038 .00006 6.55
ATE Capital & Income .00037 .00006 6.74
ATE Income & Growth .00036 .00005 7.60
CITI FUND INCOME .00036 .00004 8.16
INTERAMERICAN Long Term Bond Fund .00033 .00004 8.79
DELPHI Bond Fund .00032 .00018 1.84
IONIKI Euro – Greek Bond Fund .00028 .00002 14.70
LAIKI TELESIS Income Bond Fund .00024 .00012 2.09
Volume 29 Number 9 2003 19

TABLE 4
BOND MUTUAL FUNDS BASED ON DETERMINATION COEFFICIENT
(STOCK INDEX)
a b Adjusted R2
HERMES Income Bond Fund 2.088 14.096 .614
INTERAMERICAN Mikto .654 13.198 .585
VERGINA Fixed Income .165 12.725 .578
POSIDON Bond Fund 1.511 8.939 .391
IONIKI Income .268 8.913 .389
ERGASIAS Fixed Bond Fund 2.099 8.093 .367
GENIKI Bond Fund 1.507 7.647 .318
ALLIANZ PLUS Bond Fund -.490 7.369 .302
METROLIFE Income Bond Fund 3.270 6.732 .265
ATTIKI Income Bond Fund 4.837 6.364 .260
DELOS Income 1.251 6.417 .246
XIOS Bond Fund .855 .416 .209
MIDLAND Income Bond Fund 3.944 5.361 .192
ALLIANZ Fixed Income -.807 5.413 .187
ASPIS Bond Fund 1.905 5.250 .178
ABN AMRO Bond Fund 1.629 5.185 .174
ALPHA TRUST Income3 3.316 4.946 .160
ATE Income and Growth .419 3.917 .124
EGNATIA-MYCYNEA Fixed Income -.439 3.922 .105
INTERNATIONAL Long-Term Bond Fund 2.204 1.815 .093
ALPHA TRUST Bond Fund 1.666 .989 .087
BARCLAYS Bond Fund 1.004 3.127 .085
CYPRUS Bond Fund -.146 3.383 .078
DORIKI Bond Fund 2.620 1.740 .073
ATE Income Bond Fund .983 2.785 .072
DELPHI Bond Fund -.646 2.864 .069
CRETAFUND Bond Fund 3.594 -.335 .068
ATHINON Bond Fund 2.164 .474 .064
EUROPAIKI PISTI Bond Fund 4.164 .856 .062
ALICO EUROBANK Bond Fund .122 2.213 .060
LAIKI TELESIS Income Bond Fund -1.050 2.482 .040
KOSMOS INCOME 1.270 2.447 .039
ALPHA Bond Fund 5.305 -1.387 .007
INTERAMERICAN Long-Term Bond Fund 8.063 -1.346 .007
INTERAMERICAN Fixed 5.408 1.326 .006
IONIKI Euro-Greek Bond Fund 14.373 1.258 .005
INTERNATIONAL Bond Fund 1.743 .733 -.004
ALPHA Income 8.018 -.472 -.006
CITI FUND INCOME 4.713 .564 -.006
IONIKI Life Fixed Income3 5.750 .336 -.007
BETA Bond Fund 3.238 .141 -.008
ATE Capital and Income 2.756 -.421 -.026
Managerial Finance 20

TABLE 5
COMPARISON OF ADJUSTED COEEFFICINT OF DETERMINATION
Adjusted R2 Change
Stock Index Bond Index
ABN AMRO Bond Fund .174 .630 -.456
ATHINON Bond Fund .064 .508 -.444
ALICO EUROBANK Bond Fund .060 .719 -.659
ALLIANZ PLUS Bond Fund .302 .569 -.267
ALLIANZ Fixed Income .187 .798 -.611
ALPHA TRUST Income .160 .370 -.210
ALPHA TRUST Bond Fund .087 .528 -.441
ALPHA Bond Fund .007 .110 -.103
ALPHA Income -.006 .057 -.063
ASPIS Bond Fund .178 .112 .066
ATE Income Bond Fund .072 .698 -.626
ATE Capital and Income -.026 .062 -.088
ATE Income and Growth .124 .818 -.694
ATTIKI Income Bond Fund .260 .038 .222
BARCLAYS Bond Fund .085 .819 -.734
VERGINA Fixed Income .578 .400 .178
BETA Bond Fund -.008 .041 -.049
GENIKI Bond Fund .318 .719 -.401
CITI FUND INCOME -.006 .491 -.497
CRETAFUND Bond Fund .068 .090 -.022
DELPHI Bond Fund .069 .733 -.664
DELOS Income .246 .623 -.377
DORIKI Bond Fund .073 .423 -.350
EGNATIA-MYCYNEA Fixed Income .105 .767 -.662
ERGASIAS Fixed Bond Fund .367 .500 -.133
HERMES Income Bond Fund .614 .227 .387
EUROPAIKI PISTI Bond Fund .062 .159 -.097
INTERAMERICAN Long-Term Bond Fund .007 .107 -.100
INTERAMERICAN Mikto .585 .516 .069
INTERAMERICAN Fixed .006 .540 -.534
INTERNATIONAL Long-Term Bond Fund .093 .379 -.286
INTERNATIONAL Bond Fund -.004 .077 -.081
IONIKI Income .389 .652 -.263
IONIKI Euro-Greek Bond Fund .005 .002 .003
IONIKI Life Fixed Income3 -.007 .069 -.076
KOSMOS INCOME .039 .505 -.466
CYPRUS Bond Fund .078 .720 -.642
LAIKI TELESIS Income Bond Fund .040 .893 -.853
METROLIFE Income Bond Fund .265 .200 .065
MIDLAND Income Bond Fund .192 .384 -.192
POSIDON Bond Fund .391 .206 .185
XIOS Bond Fund .209 .268 -.059