Scenario modeling for the management of international bond portfolios

Andrea Consiglio, Andrea Beltratti, Andrea Consiglio, Stavros A. Zenios

Risultato della ricerca: Articlepeer review

20 Citazioni (Scopus)

Abstract

We address the problem of portfolio management in the international bond markets. Interest rate risk in the local market, exchange rate volatility across markets, and decisions for hedging currency risk are integral parts of this problem. The paper develops a stochastic programming optimization model for integrating these decisions in a common framework. Monte Carlo simulation procedures, calibrated using historical observations of volatility and correlation data, generate jointly scenarios of interest and exchange rates. The decision maker's risk tolerance is incorporated through a utility function, and additional views on market outlook can also be incorporated in the form of user specified scenarios. The model prescribes optimal asset allocation among the different markets and determines bond-picking decisions and appropriate hedging ratios. Therefore, several interrelated decisions are cast in a common framework, while in the past these issues were addressed separately. Empirical results illustrate the efficacy of the simulation models in capturing the uncertainties of the Salomon Brothers international bond market index.
Lingua originaleEnglish
pagine (da-a)227-247
Numero di pagine21
RivistaAnnals of Operations Research
Volume85
Stato di pubblicazionePublished - 1999

All Science Journal Classification (ASJC) codes

  • ???subjectarea.asjc.1800.1800???
  • Management Science and Operations Research

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