Implementable Corporate Bond Portfolios: Investing Across Mandates

Abstract

We propose an approach for corporate bond allocation that directly models individual bond portfolio weights as a function of bond characteristics while imposing realistic short-sale constraints and transaction costs within the investor's objective function, making the allocation "implementable." We document substantial economic gains for implementable strategies that tilt toward characteristics commonly used as risk proxies. Active strategies yield significantly higher and robust out-of-sample certaintyequivalent returns compared to passive benchmarks. Our approach quantifies the economic benefits from relaxing investment mandates. We show that implementable weights are rebalanced in anticipation of changes in investment opportunities within the credit market and broader economy.

Keywords: JEL-Classification: G11, G12, C13, C58 Keywords: corporate bonds, empirical portfolio choice, characteristics

JEL Classification: G11, G12, C58, C13