A Factor Allocation Approach to Optimal Bond Portfolio |
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Authors: | Keita Nakayama Akihiko Takahashi |
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Institution: | (1) Graduate School of Economics, The University of Tokyo, Tokyo, Japan |
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Abstract: | This paper proposes a new method to a bond portfolio problem in a multi-period setting. In particular, we apply a factor allocation
approach to constructing the optimal bond portfolio in a class of multi-factor Gaussian yield curve models. In other words,
we consider a bond portfolio problem in terms of a factors’ allocation problem. Thus, we can obtain clear interpretation about
the relation between the change in the shape of a yield curve and dynamic optimal strategy, which is usually hard to be obtained
due to high correlations among individual bonds. We first present a closed form solution of the optimal bond portfolio in
a class of the multi-factor Gaussian term structure model. Then, we investigate the effects of various changes in the term
structure on the optimal portfolio strategy through series of comparative statics. |
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Keywords: | Dynamic bond portfolio problem Multi-factor affine term structure model Martingale method Clark– Ocone formula |
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