Optimal Portfolio Choice in Corporate Bond Markets
43 Pages Posted: 18 Aug 2017 Last revised: 12 Nov 2018
Date Written: November 12, 2018
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
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