Scenario-based dynamic corporate bond portfolio management

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

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

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 languageBritish English
Pages (from-to)341-364
Number of pages24
JournalIMA Journal of Management Mathematics
Volume23
Issue number4
DOIs
StatePublished - Oct 2012

Keywords

  • credit risk
  • Monte Carlo simulation
  • multistage stochastic programming
  • scenario generation

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