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Desirable Portfolios in Fixed Income Markets: Application to Credit Risk Premiums

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  • José Garrido

    (Department of Mathematics and Statistics, Concordia University, Montreal, QC H3G 1M8, Canada)

  • Ramin Okhrati

    (Mathematical Sciences, University of Southampton, Southampton SO17 1BJ, UK)

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.

Suggested Citation

  • José Garrido & Ramin Okhrati, 2018. "Desirable Portfolios in Fixed Income Markets: Application to Credit Risk Premiums," Risks, MDPI, vol. 6(1), pages 1-21, March.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:1:p:23-:d:136998
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    References listed on IDEAS

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    Cited by:

    1. Ahmed Imran Hunjra & Tahar Tayachi & Rashid Mehmood & Sidra Malik & Zoya Malik, 2020. "Impact of Credit Risk on Momentum and Contrarian Strategies: Evidence from South Asian Markets," Risks, MDPI, vol. 8(2), pages 1-14, April.

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