IDEAS home Printed from https://ideas.repec.org/p/kud/kuiefr/200507.html
   My bibliography  Save this paper

How to Invest Optimally in Corporate Bonds: A Reduced-Form Approach

Author

Listed:
  • Holger Kraft

    (Department of Mathematics, University of Kaiserslautern)

  • Mogens Steffensen

    (Fraunhofer ITWM, Institute for Industrial Mathematics, Department of Finance, Kaiserslautern)

Abstract

In this paper, we analyze the impact of default risk on the portfolio decision of an investor wishing to invest in corporate bonds. Default risk is modeled via a reduced form approach and we allow for random recovery as well as joint default events. Depending on the structure of the model, we are able to derive almost explicit results for the optimal portfolio strategies. It is demonstrated how these strategies change if common default factors can trigger defaults of more than one bond or different recovery assumptions are imposed. In particular, we analyze the effect of beta distributed loss rates.

Suggested Citation

  • Holger Kraft & Mogens Steffensen, 2005. "How to Invest Optimally in Corporate Bonds: A Reduced-Form Approach," FRU Working Papers 2005/07, University of Copenhagen. Department of Economics. Finance Research Unit.
  • Handle: RePEc:kud:kuiefr:200507
    as

    Download full text from publisher

    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2005/2005_07.pdf
    Download Restriction: no

    Citations

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


    Cited by:

    1. Morten Mosegaard Christensen & Eckhard Platen, 2007. "Sharpe Ratio Maximization And Expected Utility When Asset Prices Have Jumps," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(08), pages 1339-1364.

    More about this item

    Keywords

    portfolio optimization; stochastic interest rates; default risk; recovery risk; beta distribution;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:kud:kuiefr:200507. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann). General contact details of provider: http://edirc.repec.org/data/okokudk.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.