Desirable portfolios in fixed income markets: Application to credit risk premiums
Desirable portfolios in fixed income markets: Application to credit risk premiums
An arbitrage portfolio provides a cash flow that can never be negative at zero cost. We define the weaker concept of a “desirable portfolio” delivering cash flows with negative risk at zero cost. Although these are not completely risk-free investments and subject to the risk measure used, they can provide attractive investment opportunities for investors. We investigate in detail the theoretical aspects of this portfolio selection procedure and the existence of such opportunities in fixed income markets. Then, we present two applications of the theory: one in analyzing market integration problem 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
Garrido, Jose
f1c4a12e-0754-4aa4-81e9-949325bc7574
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
19 March 2018
Garrido, Jose
f1c4a12e-0754-4aa4-81e9-949325bc7574
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
Garrido, Jose and Okhrati, Ramin
(2018)
Desirable portfolios in fixed income markets: Application to credit risk premiums.
Risks, 6 (1), [23].
(doi:10.3390/risks6010023).
Abstract
An arbitrage portfolio provides a cash flow that can never be negative at zero cost. We define the weaker concept of a “desirable portfolio” delivering cash flows with negative risk at zero cost. Although these are not completely risk-free investments and subject to the risk measure used, they can provide attractive investment opportunities for investors. We investigate in detail the theoretical aspects of this portfolio selection procedure and the existence of such opportunities in fixed income markets. Then, we present two applications of the theory: one in analyzing market integration problem 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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Accepted/In Press date: 12 March 2018
e-pub ahead of print date: 19 March 2018
Published date: 19 March 2018
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Local EPrints ID: 418834
URI: http://eprints.soton.ac.uk/id/eprint/418834
ISSN: 2227-9091
PURE UUID: 2850cd16-8fdf-4015-aea6-a9444f7cac00
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Date deposited: 23 Mar 2018 17:30
Last modified: 15 Mar 2024 18:58
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Author:
Jose Garrido
Author:
Ramin Okhrati
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