Dynamic Allocation of Treasury and Corporate Bond Portfolios
FAME Research Paper No. 64
56 Pages Posted: 12 Jun 2002
Date Written: December 2002
Abstract
In this paper, we solve the intertemporal investment problem of an investor holding a portfolio of default-free and defaultable bonds. Default-risk is modeled in an intensity based framework with state variables following an affine diffusion. The structure of the optimal portfolio over time is investigated and compared to the static mean-variance portfolio. Furthermore, we describe the impact of time varying market prices of risk and interdependencies between interest rates and credit risk on the optimal portfolio structure.
Keywords: Dynamic Asset Allocation, Portfolio Management, Credit Risk
JEL Classification: D9, G11
Suggested Citation: Suggested Citation
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