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Portfolio Management for a Random Field of Bond Returns

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  • Vladislav Kargin

    (Cornerstone Research)

Abstract

A new method of bond portfolio optimization is described. The method is based on stochastic string models of bond returns. It is shown how to approximate the bond return correlation function with Padé approximations and how to compute the optimal portfolio allocation using Wiener-Hopf factorization. The technique is illustrated with an example of the Treasury bond portfolio.

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File URL: http://128.118.178.162/eps/fin/papers/0310/0310007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0310007.

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Length: 13 pages
Date of creation: 07 Oct 2003
Date of revision:
Handle: RePEc:wpa:wuwpfi:0310007

Note: Type of Document - PDF; prepared on IBM PC ; pages: 13 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: bond portfolio management; stochastic string; Toeplitz operators; Padé approximations; Wiener-Hopf factorization.;

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  1. Heaney, W John & Cheng, Pao L, 1984. " Continuous Maturity Diversification of Default-Free Bond Portfolios and a Generalization of Efficient Diversification," Journal of Finance, American Finance Association, vol. 39(4), pages 1101-17, September.
  2. D. P. Kennedy, 1994. "The Term Structure Of Interest Rates As A Gaussian Random Field," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 247-258.
  3. Santa-Clara, Pedro & Sornette, Didier, 2001. "The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 149-85.
  4. Zenios, Stavros A. & Holmer, Martin R. & McKendall, Raymond & Vassiadou-Zeniou, Christiana, 1998. "Dynamic models for fixed-income portfolio management under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 22(10), pages 1517-1541, August.
  5. Goldstein, Robert S, 2000. "The Term Structure of Interest Rates as a Random Field," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 365-84.
  6. John M. Mulvey & Stavros A. Zenios, 1994. "Capturing the Correlations of Fixed-income Instruments," Management Science, INFORMS, vol. 40(10), pages 1329-1342, October.
  7. Golub, Bennett & Holmer, Martin & McKendall, Raymond & Pohlman, Lawrence & Zenios, Stavros A., 1995. "A stochastic programming model for money management," European Journal of Operational Research, Elsevier, vol. 85(2), pages 282-296, September.
  8. Andrea Beltratti & Andrea Consiglio & Stavros A. Zenios, 1998. "Scenario Modeling for the Management of International Bond Portfolios," Center for Financial Institutions Working Papers 98-20, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. D. P. Kennedy, 1997. "Characterizing Gaussian Models of the Term Structure of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 107-118.
  10. Dupacova, Jitka & Bertocchi, Marida, 2001. "From data to model and back to data: A bond portfolio management problem," European Journal of Operational Research, Elsevier, vol. 134(2), pages 261-278, October.
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