Portfolio allocation to corporate bonds with correlated defaults

This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility ofcorrelated defaults. Under fairly general assumptions for the distribution of thetotal net assets of a set of firms we show that retaining the first few momentsof the portfolio default loss distribution gives an extremely good approximationto the full solution of the asset allocation problem. We provide detailedresults on the convergence of the moment expansion. We also provide explicitresults for the inverse problem, ie, for a given allocation to the set of riskybonds, what is the average risk premium required to make the portfoliooptimal. Numerous numerical illustrations exhibit the results for realistic portfoliosand utility functions.

Journal of Risk click here
Online References:
Das, S., Fong, G. and Geng, G. (2001). The impact of correlated default risk on credit portfolios. Journal of Fixed Income 11(3), 9–19.

Rebonato, R. and Jäckel, P. (2000). The most general methodology for creating a valid correlation matrix for risk management and option pricing purposes. The Journal of Risk 2(2), 17–26.

Zhou, C. (2001). An analysis of default correlations and multiple defaults. The Review ofFinancial Studies 12(2), 555–76.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here