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Fixed-income portfolio management in crisis period: Expected tail loss (ETL) approach


  • Mili, Mehdi


The purpose of this study is to develop an efficient strategy for managing fixed-income portfolios in crisis periods. We use the volatility ratio model of Briere and Szafarz (2008) and the Expected Tail Loss (ETL) approach of Litzenberger and Modest (2008). Our methodology is applied to U.S. and European markets of fixed-income products using interest rates at different maturities over the period 2002 through 2010. U.S. portfolio exhibits his optimum with small amounts of interest rates belonging to the short-term strategy and the European portfolio exhibits his optimum with small amounts belonging to the long-term strategy. The results show that the ETL is a better measure of the downside risk than the Value-at-Risk (VaR). For instance, the U.S. (European) portfolio has a VaR of -3.6% (-0.7%) against an ETL of -6% (-0.8%). Moreover, we find that, for these two geographical areas, the short-term interest rates make little contribution to the overall ETL of the American fixed-income portfolio and vice versa for the European portfolio.

Suggested Citation

  • Mili, Mehdi, 2012. "Fixed-income portfolio management in crisis period: Expected tail loss (ETL) approach," Economics Discussion Papers 2012-33, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201233

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    References listed on IDEAS

    1. Andrew Ang & Geert Bekaert, 2003. "How do Regimes Affect Asset Allocation?," NBER Working Papers 10080, National Bureau of Economic Research, Inc.
    2. repec:dau:papers:123456789/7748 is not listed on IDEAS
    3. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, February.
    4. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    5. Marie Briere & Ariane Szafarz, 2007. "Crisis-Robust Bond Portfolios," Working Papers CEB 07-030.RS, ULB -- Universite Libre de Bruxelles.
    6. Arjan B. Berkelaar & Roy Kouwenberg & Thierry Post, 2004. "Optimal Portfolio Choice under Loss Aversion," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 973-987, November.
    7. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2006. "Portfolio implications of systemic crises," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2347-2369, August.
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    More about this item


    fixed-income portfolio; financial crisis; flight-to-quality; contagion; expected tail loss;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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