A Minimizing Risk Strategy for Brazilian Fixed-Income Portfolios

This study presents various risk immunization strategies for fixed-income portfolios, including not only classical measures like duration, convexity, and dispersion but also modern measures such as VaR (value-at-risk) and ES (expected shortfall). Empirical tests are conducted in the Brazilian domestic and international bond market. Because it has had one of highest interest rates since the 1990s, Brazil offers an interesting case study for fixed-income studies. Our results are different for domestic and international bonds. For domestic bonds, using the highest convexity criterion to choose the best portfolio is better than using minimum dispersion, and there is a coincidence between the optimum portfolio selected by the convexity, historical VaR, and ES criteria. For international bonds, our findings indicate that the minimum dispersion strategy performs much better than the maximum convexity strategy. The overall performance of portfolios chosen by minimum VaR and ES criteria is also good, with satisfactory realized returns and squared errors.