On the Diversification of Fixed Income Assets

19 Pages Posted: 14 Dec 2020

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Date Written: December 1, 2020

Abstract

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

Suggested Citation

Le Courtois, Olivier Arnaud, On the Diversification of Fixed Income Assets (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3740580 or http://dx.doi.org/10.2139/ssrn.3740580

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

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