@article {Balb{\'a}s61, author = {Alejandro Balb{\'a}s and Ricardo Laborda}, title = {Interest Rate Future Quality Options and Negative Interest Rates}, volume = {28}, number = {1}, pages = {61--73}, year = {2018}, doi = {10.3905/jfi.2018.28.1.061}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This article verifies the existence of diversification gains from considering the {\textquotedblleft}quality option asset strategy,{\textquotedblright} which adds the portfolio replicating the interest rate future quality option, as proposed by Balb{\'a}s and Reichardt (2010), and a portfolio composed of stock and bonds. The empirical results show that the gains are statistically and economically significant, especially in the negative one-month Euribor rate period. The out-of-sample optimal tangency portfolio, which includes {\textquotedblleft}quality option replicas,{\textquotedblright} delivers an increase in the Sharpe ratio of around 40\%, as well as a positive return-loss offsetting the costs of higher turnover. The main source of the diversification gains emanates from the very low correlation between quality options and stocks.TOPICS: Portfolio construction, options, statistical methods}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/28/1/61}, eprint = {https://jfi.pm-research.com/content/28/1/61.full.pdf}, journal = {The Journal of Fixed Income} }