Implications of Correlated Default for Portfolio Allocation to Corporate Bonds

Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005

Posted: 30 Mar 2005

See all articles by Mark B. Wise

Mark B. Wise

California Institute of Technology

Vineer Bhansali

LongTail Alpha, LLC

Multiple version iconThere are 2 versions of this paper

Abstract

This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Using a multivariate normal Copula function for the joint default probabilities we show that retaining the first few moments of the portfolio default loss distribution gives an extremely good approximation to the full solution of the asset allocation problem. We provide detailed results on the convergence of the moment expansion and explore how the optimal portfolio allocation depends on recovery fractions, level of diversification and investment time horizon. Numerous numerical illustrations exhibit the results for simple portfolios and utility functions.

Keywords: Portfolio, correlated default, corporate bonds

Suggested Citation

Wise, Mark B. and Bhansali, Vineer, Implications of Correlated Default for Portfolio Allocation to Corporate Bonds. Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005. Available at SSRN: https://ssrn.com/abstract=679064

Mark B. Wise (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States
626-395-6687 (Phone)
626-568-8473 (Fax)

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
498
PlumX Metrics