Optimal Portfolio Choice in Corporate Bond Markets

43 Pages Posted: 18 Aug 2017 Last revised: 12 Nov 2018

See all articles by Mary Pieterse-Bloem

Mary Pieterse-Bloem

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Zhaowen Qian

Erasmus University Rotterdam (EUR) - Department of Business Economics

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: November 12, 2018

Abstract

In this paper, we propose a dynamic portfolio strategy for European corporate bonds based on a two-factor pricing model. We introduce a strategy in which we forecast both future factors as well as bonds' future exposure to these factors. Using a unique dataset that is representative of the universe of actively quoted European corporate bonds, we find that the strategy based on forecasted factors outperforms a number of benchmark strategies, whereas the strategy based on forecasted exposures does not. We also find that there is ample time variation in the performance, related to market uncertainty and the level of market integration. At the individual bond level, we find significant outperformance over the benchmark.

Keywords: Corporate bonds; Dynamic portfolio strategies; Country and industry factors; Mean-variance model

JEL Classification: G11, G12, G17

Suggested Citation

Pieterse-Bloem, Mary and Verschoor, Willem F. C. and Qian, Zhaowen and Zwinkels, Remco C.J., Optimal Portfolio Choice in Corporate Bond Markets (November 12, 2018). Available at SSRN: https://ssrn.com/abstract=3020999 or http://dx.doi.org/10.2139/ssrn.3020999

Mary Pieterse-Bloem

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Willem F. C. Verschoor (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Zhaowen Qian

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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