Price and market risk reduction for bond portfolio selection in BRICS markets
-
DOIhttp://dx.doi.org/10.21511/imfi.15(1).2018.11
-
Article InfoVolume 15 2018, Issue #1, pp. 120-131
- Cited by
- 1421 Views
-
191 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper focuses on classical portfolio strategies applied to five countries, which are Brazil, Russia, India, China and South Africa. These five countries form the so-called BRICS group. In particular, the authors investigate their corporate and sovereign bond market and evaluate whether these markets can represent a profitable investment for non-satiable and risk-averse investors. Two-step optimization is proposed to control price risk and market risk. For price risk management, classical immunization strategies and are obtained funds of bond are obtained that share the same risk measure. For market risk control, the previously found funds are used and a performance measure optimization commonly used in stock markets is applied to define the best portfolio of funds. Therefore, the resulting optimal portfolio controls the price risk and jointly maximizes a desired performance measure that includes the market risk. Finally, the authors propose an empirical analysis to evaluate the profitability of the suggested two-step optimization for the five BRICS countries and compare the ex-post sample paths of the obtained portfolios for testing the stochastic dominance relations.
- Keywords
-
JEL Classification (Paper profile tab)G11
-
References29
-
Tables1
-
Figures10
-
- Figure 1. Ex-post wealth on Brazilian bond portfolios after first phase (October 2011–April 2015)
- Figure 2. Ex-post wealth on Russian bond portfolios after first phase (May 2011–April 2015)
- Figure 3. Ex-post wealth on Indian bond portfolios after first phase (May 2011–April 2015)
- Figure 4. Ex-post wealth on Chinese bond portfolios after first phase (May 2011–April 2015)
- Figure 5. Ex-post wealth on South African bond portfolios after first phase (May 2011–April 2015)
- Figure 6. Ex-post wealth on Brazilian bonds after second phase
- Figure 7. Ex-post wealth on Russian bonds after second phase
- Figure 8. Ex-post wealth on Indian bonds after second phase
- Figure 9. Ex-post wealth on Chinese bonds after second phase
- Figure 10. Ex-post wealth on South African bonds
-
- Table 1. Dominance relations between the strategies in different countries
-
- Balbàs, A., Ibàñez, A., López, S. (2002). Dispersion measures as immunization risk measures. Journal of banking & finance, 26(6), 1229-1244.
- Biglova, A., Ortobelli, S. L., Rachev, S., & Fabozzi, F. (2009). Modeling, estimation, and optimization of equity portfolios with heavy-tailed distributions. In S. Satchell (Ed.), Optimizing optimization: The next generation of optimization applications and theory (pp. 117-141). Amsterdam: Academic Press.
- Bertocchi, M., Giacometti, R., Zenios, S. A. (2005). Risk factor analysis and portfolio immunization in the corporate bond market. European Journal of Operational Research, 161(2), 348-363.
- Bertocchi, M., Consigli, G., D’Ecclesia, R., Giacometti, R., Moriggia, V., Ortobelli, S. (2013). Euro bonds: Markets, infrastructure and trends. World Scientific Books.
- Cassader, M., Ortobelli, S., Caviezel, V., Caglio, S. (2014). On the use of contingent claims in portfolio selection problems. International Journal of Economics and Statistics, 2, 220-229.
- Cirelli, S., Vitali, S., Ortobelli Lozza, S., Moriggia, V. (2017). A conservative discontinuous target volatility strategy. Investment Management and Financial Innovations, 14(2-1), 176-190.
- Davidson, R., Duclos, J. Y. (2000). Statistical inference for stochastic dominance and for the measurement of poverty and inequality. Econometrica, 68(6), 1435-1464.
- Fisher, L., Weil, R. L. (1971). Coping with the risk of interest-rate fluctuations: returns to bondholders from naive and optimal strategies. Journal of business, 44(4), 408-431.
- Fooladi, I. J., Roberts, G. S., Skinner, F. (1997) Duration for bonds with default risk. Journal of Banking & Finance, 21(1), 1-16.
- IMF (2011). World economic outlook.
- Kopa, M., Post, T. (2009). A portfolio optimality test based on the first-order stochastic dominance criterion. Journal of Financial and Quantitative Analysis, 44(05), 1103-1124.
- Kopa, M., Moriggia, V., Vitali, S. (2016). Individual optimal pension allocation under stochastic dominance constraints. Annals of Operations Research, 1-37.
- Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91.
- Mathieson, D. J., Schinasi, G. J. (2001). International Capital Markets: Developments, Prospects, and Key Policy Issues (August 2001). International Monetary Fund.
- Müller, A., Stoyan, D. (2002). Comparison methods for stochastic models and risks. Chichester: John Wiley&Sons Ltd.
- Munk, C. (2011). Fixed income modelling. Oxford University Press.
- O’Neill, J. (2011). Building Better Global Economic BRICs. Goldman Sachs Asset Management View Point.
- Ortobelli, S., Petronio, F. (2015). An analysis of fixed income BRICS markets. Proceedings of 10th International Scientific Conference Financial management of Firms and Financial Institutions, Ostrava.
- Ortobelli, S., Vitali, S., Cassader, M., Tichỳ, T. (2016). Portfolio selection strategy for fixed income markets with immunization on average. Annals of Operations Research, 1-21.
- Paroush, J., Prisman, E. Z. (1997). On the relative importance of duration constraints. Management Science, 43(2), 198-205.
- Petronio, F., Tamborini, L., Lando, T., Ortobelli Lozza, S. (2014). Portfolio selection in the BRICs stocks markets using Markov processes. International Journal of Mathematical Models and Methods in Applied Sciences, 8, 311-318.
- Redington, F. M. (1952). Review of the principles of life-office valuations. Journal of the Institute of Actuaries, 78(3), 286-340.
- Sharpe, W. F. (1994). The Sharpe ratio. The journal of portfolio management, 21(1), 49-58.
- Stoyanov, S. V., Rachev, S. T., Fabozzi, F. J. (2007). Optimal financial portfolios. Applied Mathematical Finance, 14(5), 401-436.
- Thompson, J. (2010). Current and structural developments in the financial systems of OECD enhanced engagement countries. OECD Journal: Financial Market Trends, 2009(2), 209-263.
- De la Torre, A., Schmukler, S. (2006). Emerging capital markets and globalization: the Latin American experience. World Bank Publications.
- Vašiček, O. (1977). An equilibrium characterization of the term structure. Journal of Financial Economics, 5(2), 177-188.
- Weil, R. L. (1973). Macaulay’s duration: An appreciation. The Journal of Business, 46(4), 589-592.
- Zenios, S. A. (1995). Asset/liability management under uncertainty for fixed-income securities. Annals of Operations Research, 59(1), 77-97.