Dynamic Allocation of Treasury and Corporate Bond Portfolios

FAME Research Paper No. 64

56 Pages Posted: 12 Jun 2002

See all articles by Roger Walder

Roger Walder

University of Lausanne (HEC), International Center FAME and Banque Cantonale Vaudoise, Switzerland

Date Written: December 2002

Abstract

In this paper, we solve the intertemporal investment problem of an investor holding a portfolio of default-free and defaultable bonds. Default-risk is modeled in an intensity based framework with state variables following an affine diffusion. The structure of the optimal portfolio over time is investigated and compared to the static mean-variance portfolio. Furthermore, we describe the impact of time varying market prices of risk and interdependencies between interest rates and credit risk on the optimal portfolio structure.

Keywords: Dynamic Asset Allocation, Portfolio Management, Credit Risk

JEL Classification: D9, G11

Suggested Citation

Walder, Roger, Dynamic Allocation of Treasury and Corporate Bond Portfolios (December 2002). FAME Research Paper No. 64, Available at SSRN: https://ssrn.com/abstract=313823 or http://dx.doi.org/10.2139/ssrn.313823

Roger Walder (Contact Author)

University of Lausanne (HEC), International Center FAME and Banque Cantonale Vaudoise, Switzerland ( email )

Ch. de Sus-Craux 10B
CH-1166 Perroy
Switzerland

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