A MULTISTAGE DECISION MODEL FOR THE OPTIMAL ISSUANCE OF SOVEREIGN DEBT UNDER ESA95

The aim of this paper is to develop a stochastic programmingmodel for the optimal composition of debt portfolios. Such a prob-lem has recently acquired a more and more major interest, being theindebtedness of many countries quite worrying.We propose a stochastic programming model where the decisionmaker desires to minimize a certain cost function while bounding theinterest rate risk. Our analysis focus mainly on the cost functionESA95, which is a methodology developed by the European Systemof Accounts to gauge the cost of servicing the debt.The model is implemented under two financing strategies, one as-sumes the government cannot resort to budget surplus to pay interestexpenses, and the other one the interest expenses are repaid entirely bybudget surplus. We show results about these two financing strategiesand compare the results.We conclude the paper by substituting the cost function ESA95with the market value of all the not expired debt and showing theresults of this modified model.