Desirable portfolios in fixed income markets: Application to credit risk premiums
Desirable portfolios in fixed income markets: Application to credit risk premiums
An arbitrage opportunity in a financial market provides a risk-free investment at
no cost. As an alternative to the classical arbitrage methods, we define a more general
concept in portfolio selection, called desirable opportunities, through introducing
an optimization problem where the constraints or the objectives can be constructed
according to a convex risk measure. Although these are not completely risk-free investments
and subject to the applied risk measure, they can provide attractive investment
opportunities for traders. We completely clarify theoretical backgrounds of this portfolio
selection procedure and investigate in details the existence of such opportunities
in ?fixed income markets. Then we present two applications of the theory: one in analyzing
market integration and the other in gauging the credit quality of defaultable
bonds in a portfolio. We also discuss the model calibration and provide some numerical
illustrations.
Minimization of risk measures, Desirable portfolios, Risk statistics, Market
integration, Credit premium estimation
1-26
University of Southampton
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
October 2016
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
Okhrati, Ramin
(2016)
Desirable portfolios in fixed income markets: Application to credit risk premiums
University of Southampton
Record type:
Monograph
(Working Paper)
Abstract
An arbitrage opportunity in a financial market provides a risk-free investment at
no cost. As an alternative to the classical arbitrage methods, we define a more general
concept in portfolio selection, called desirable opportunities, through introducing
an optimization problem where the constraints or the objectives can be constructed
according to a convex risk measure. Although these are not completely risk-free investments
and subject to the applied risk measure, they can provide attractive investment
opportunities for traders. We completely clarify theoretical backgrounds of this portfolio
selection procedure and investigate in details the existence of such opportunities
in ?fixed income markets. Then we present two applications of the theory: one in analyzing
market integration and the other in gauging the credit quality of defaultable
bonds in a portfolio. We also discuss the model calibration and provide some numerical
illustrations.
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Published date: October 2016
Keywords:
Minimization of risk measures, Desirable portfolios, Risk statistics, Market
integration, Credit premium estimation
Organisations:
Statistics
Identifiers
Local EPrints ID: 357108
URI: http://eprints.soton.ac.uk/id/eprint/357108
PURE UUID: 1d870509-9213-45b9-923f-9b0eb3197579
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Date deposited: 04 Oct 2013 13:14
Last modified: 14 Mar 2024 14:55
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Author:
Ramin Okhrati
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