In some cases you may wish to run attribution using a z-spread curve. The z-spread is the extra spread that must be added to all maturities on the risk-free (or base) curve to ensure that the price of the security calculated using this curve equals the price of the security in the marketplace. If the z-spread is accurate, the security return calculated by FIA should exactly equal the supplied return, and residual will be zero - although market noise usually means this is unlikely to occur.
For a particular security at a given date, a value for its z-spread can be supplied in column 13 of the weights and returns file.
To include z-spread returns in your attribution reports, ensure that
- the value of the ZSpreadAttribution switch is on;
- for each weight and return date supplied, a value for z-spread has also been supplied in the portfolio file. Values of z-spread must be supplied on all dates for which calculation is active, including the date at the start of the first interval. If a missing value is found and is active, the program will halt with an error message.
Z-spread attribution can be run in conjunction with as many curves as required.
Limitations
Use of a z-spread generates a zero-coupon curve from which securities can be priced. In contrast, a YTM cannot be used for security pricing as it includes the distorting effects of coupons. Therefore the two approaches are not consistent and cannot be combined.