IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v18y2015i01ns0219024915500028.html
   My bibliography  Save this article

Optimal Credit Allocation Under Regime Uncertainty With Sensitivity Analysis

Author

Listed:
  • GUILLAUME BERNIS

    (Natixis Asset Management, Fixed Income, Paris, France)

  • LAURENCE CARASSUS

    (LMR (EA 4535), Université Reims Champagne Ardenne, Reims, France)

  • GRÉGOIRE DOCQ

    (Natixis Asset Management, Fixed Income, Paris, France)

  • SIMONE SCOTTI

    (LPMA, Université Paris Diderot, Paris, France)

Abstract

We consider the problem of credit allocation in a regime-switching model. The global evolution of the credit market is driven by a benchmark, the drift of which is given by a two-state continuous-time hidden Markov chain. We apply filtering techniques to obtain the diffusion of the credit assets under partial observation and show that they have a specific excess return with respect to the benchmark. The investor performs a simple mean–variance allocation on credit assets. However, returns and variance matrix have to be computed by a numerical method such as Monte Carlo, because of the dynamics of the system and the non-linearity of the asset prices. We use the theory of Dirichlet forms to deal with the uncertainty on the excess returns. This approach provides an estimation of the bias and the variance of the optimal allocation, and return. We propose an application in the case of a sectorial allocation with Credit Default Swaps (CDS), fully calibrated with observable data or direct input given by the portfolio manager.

Suggested Citation

  • Guillaume Bernis & Laurence Carassus & Grégoire Docq & Simone Scotti, 2015. "Optimal Credit Allocation Under Regime Uncertainty With Sensitivity Analysis," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-27.
    • Handle: RePEc:wsi:ijtafx:v:18:y:2015:i:01:n:s0219024915500028
    DOI: 10.1142/S0219024915500028
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024915500028
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024915500028?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guillaume Bernis & Nicolas Brunel & Antoine Kornprobst & Simone Scotti, 2017. "Stochastic Evolution of Distributions - Applications to CDS indices," Documents de travail du Centre d'Economie de la Sorbonne 17007, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. Guillaume Bernis & Nicolas Brunel & Antoine Kornprobst & Simone Scotti, 2017. "Stochastic Evolution of Distributions - Applications to CDS indices," Post-Print halshs-01467736, HAL.
    3. Guillaume Bernis & Nicolas Brunel & Antoine Kornprobst & Simone Scotti, 2017. "Stochastic Evolution of Distributions - Applications to CDS indices," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01467736, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:18:y:2015:i:01:n:s0219024915500028. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.