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Desirable portfolios in fixed income markets: Application to credit risk premiums

Garrido, J; Okhrati, R; (2018) Desirable portfolios in fixed income markets: Application to credit risk premiums. Risks , 6 (1) , Article 23. 10.3390/risks6010023. Green open access

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Abstract

An arbitrage portfolio provides a cash flow that can never be negative at zero cost. We define the weaker concept of a “desirable portfolio” delivering cash flows with negative risk at zero cost. Although these are not completely risk-free investments and subject to the risk measure used, they can provide attractive investment opportunities for investors. We investigate in detail the theoretical aspects of this portfolio selection procedure and the existence of such opportunities in fixed income markets. Then, we present two applications of the theory: one in analyzing market integration problem and the other in gauging the credit quality of defaultable bonds in a portfolio. We also discuss the model calibration and provide some numerical illustrations.

Type: Article
Title: Desirable portfolios in fixed income markets: Application to credit risk premiums
Open access status: An open access version is available from UCL Discovery
DOI: 10.3390/risks6010023
Publisher version: https://doi.org/10.3390/risks6010023
Language: English
Additional information: This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/)
Keywords: minimization of risk measures; desirable portfolios; risk statistics; market integration; credit premium estimation
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Civil, Environ and Geomatic Eng
URI: https://discovery.ucl.ac.uk/id/eprint/10081494
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