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Reduced form models of bond portfolios

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  • Matti Koivu
  • Teemu Pennanen

Abstract

We derive simple return models for several classes of bond portfolios. With only one or two risk factors our models are able to explain most of the return variations in portfolios of fixed rate government bonds, inflation linked government bonds and investment grade corporate bonds. The underlying risk factors have natural interpretations which make the models well suited for risk management and portfolio design.

Suggested Citation

  • Matti Koivu & Teemu Pennanen, 2010. "Reduced form models of bond portfolios," Papers 1011.3246, arXiv.org.
    • Handle: RePEc:arx:papers:1011.3246
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    1. Robert A. Jarrow & David Lando & Fan Yu, 2008. "Default Risk And Diversification: Theory And Empirical Implications," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 19, pages 455-480, World Scientific Publishing Co. Pte. Ltd..
    2. Philipp J. Schonbucher, 1997. "Team Structure Modelling of Defaultable Bonds," FMG Discussion Papers dp272, Financial Markets Group.
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