Abstract

http://ssrn.com/abstract=2002040
 


 



Managing the Risks of Corporate Bond Portfolios: New Evidence in the Light of the
Sub‐Prime Crisis


Giovanni Barone-Adesi


Swiss Finance Institute at the University of Lugano; Swiss Finance Institute

Nicola Carcano


University of Lugano

Hakim Dall'O


Swiss Finance Institute at the University of Lugano

February 1, 2012

Swiss Finance Institute Research Paper No. 12-04

Abstract:     
We consider modeling errors in the hedging of a portfolio composed from BBB‐rated bonds. By doing this, we open a new perspective to the debate on the relationship between corporate bonds and CDS spreads. We find that in ordinary times the added value of indexlinked credit derivatives is very limited: hedging portfolios including only T‐bond futures can reduce the variance by 80‐85%. This compares well to the maximum variance reduction of 50% reported by previous studies. On the contrary, in times of extraordinary volatility – such as the years 2008 and 2009 ‐ T‐bond futures would have been insufficient to successfully hedge the bond portfolio. However, including the 5‐year CDX contract would have only slightly improved the quality of hedging. This is consistent with the literature identifying an important non‐default component within corporate bond spreads. Our results encourage the offering of collateralized credit spread forwards as more effective hedging instruments than non‐collateralized CDS contracts.

Number of Pages in PDF File: 54

Keywords: hedging, corporate bonds, model errors

JEL Classification: C51, G13, G32

working papers series


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Date posted: February 11, 2012  

Suggested Citation

Barone-Adesi, Giovanni and Carcano, Nicola and Dall'O, Hakim, Managing the Risks of Corporate Bond Portfolios: New Evidence in the Light of the Sub‐Prime Crisis (February 1, 2012). Swiss Finance Institute Research Paper No. 12-04. Available at SSRN: http://ssrn.com/abstract=2002040 or http://dx.doi.org/10.2139/ssrn.2002040

Contact Information

Giovanni Barone-Adesi (Contact Author)
Swiss Finance Institute at the University of Lugano ( email )
Via Buffi 13
CH-6904 Lugano
Switzerland
+41 58 666 4671 (Phone)
+41 58 666 46 47 (Fax)
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Nicola Carcano
University of Lugano ( email )
Via Sole 14
Ruvigliana, 6977
Switzerland
Hakim Dall'O
Swiss Finance Institute at the University of Lugano ( email )
Via Buffi 13
Lugano, CH-6900
Switzerland
+41 58 666 4497 (Phone)
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