On the Diversification of Fixed Income Assets
19 Pages Posted: 14 Dec 2020
Date Written: December 1, 2020
This article introduces a new approach for dealing with the diversification/concentration risk of fixed income assets. Because Government bonds, corporate bonds, and mortgage securities constitute most of the assets of insurance companies in most countries, it is important to be able to determine the number of lines/issuers of such assets, not only for portfolio management, but also for risk management purposes. The approach that we introduce allows us to show the dependence of the critical number of lines of fixed income assets on the main interest rate risk and credit risk drivers. Specifically, we examine the importance of volatility risk, force of mean reversion, default risk, recovery risk, and default dependence risk on the critical number of fixed income assets in which an insurance business should invest.
Keywords: Diversification, Interest Rate Risk, Credit Risk, Asset-Liability Management, Corporate Bonds, Fixed Income
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