Hedging market and credit risk in corporate bond portfolios

Patrizia Beraldi, Giorgio Consigli, Francesco de Simone, Gaetano Iaquinta, Antonio Violi

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

2 Scopus citations

Abstract

The European market for corporate bonds has grown significantly over the last two decades to become a preferable financing channel for large corporations in the local and Eurobond markets. The 2008 credit crisis has, however, dramatically changed corporations funding opportunities with similar effects on borrowing policies of sovereigns as well. Accordingly institutional and individual investors have progressively reduced the share of credit risky instruments in their portfolios. This chapter investigates the potential of multistage stochastic programming to provide the desired market and credit risk control for such portfolios over the recent, unprecedented financial turmoil. We consider a Eurobond portfolio, traded in the secondary market, subject to interest and credit risk and analyse whether a jump-to-default risk model and a dynamic control policy would have reduced the impact of severe market shocks on the portfolios during the crisis, to limit the systemic impact of investment strategies. The methodology is shown to provide an effective alternative to popular hedging techniques based on credit derivatives at a time in which such markets became extremely illiquid during the Fall of 2008.

Original languageBritish English
Title of host publicationInternational Series in Operations Research and Management Science
Pages73-98
Number of pages26
DOIs
StatePublished - 2011

Publication series

NameInternational Series in Operations Research and Management Science
Volume163
ISSN (Print)0884-8289

Keywords

  • Bond portfolio optimization
  • Credit risk
  • Multistage stochastic programming

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