Crisis-Robust Bond Portfolios

Abstract

This paper defines a “crisis-robust portfolio” that satisfies the minimal crisis-to-quiet time volatility ratio. This type of portfolio is less demanding for the investor than a regime-wise asset allocation. Although general, the concept of a crisis-robust portfolio is especially pertinent when applied to the bond market, which offers a flight-to-quality trade-off during crises (all volatilities increase but most correlations decrease). Using three categories of bonds (sovereign, investment grade corporate, and high yield corporate) in the U.S. and Eurozone for the period 1998-2007, we demonstrate the composition of crisis-robust portfolios and discuss the stabilizing role played by low-quality bonds during crises.

Keywords: financial crisis, portfolio management, bonds, fly-to-quality

JEL Classification: G11, G15, N20