Abstract
The 2008 credit crisis has deeply affected the price of corporate liabilities in both equity and fixed income secondary markets leading to unprecedented portfolio losses by financial investors. A coordinated intervention by monetary institutions limited the systemic consequences of the crisis, without, however, avoiding a significant fall of corporate bond prices across international markets. In this article, we analyse alternative portfolio optimization approaches in the fixed income market over the 2008-2009 period, a time in which credit derivative markets became very illiquid. All policies are analysed relying on a unique set of market and credit scenarios generated by common and idiosyncratic risk factors on an extended investment universe. The crisis provides an interesting test period to analyse in particular the potential of dynamic versus static portfolio selection approaches. We also consider dynamic portfolio strategies based on multistage stochastic programming versus policy rule-based methods and analyse their relative performance against a corporate bond index widely adopted in practice as a market benchmark. The authors 2012. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.2012
Original language | British English |
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Pages (from-to) | 341-364 |
Number of pages | 24 |
Journal | IMA Journal of Management Mathematics |
Volume | 23 |
Issue number | 4 |
DOIs | |
State | Published - Oct 2012 |
Keywords
- credit risk
- Monte Carlo simulation
- multistage stochastic programming
- scenario generation