Bond portfolio optimization using dynamic factor models

João F. Caldeira, Guilherme Moura () and Andre Santos ()

Journal of Empirical Finance, 2016, vol. 37, issue C, 128-158

Abstract: A general class of dynamic factor models is used to obtain optimal bond portfolios, and to develop a duration-constrained mean-variance optimization, which can be used to improve bond indexing. An empirical application involving two large data sets of U.S. Treasuries shows that the proposed portfolio policy outperforms a set of yield curve strategies used in bond desks. Additionally, we propose a dynamic rule to switch among alternative bond investment strategies, and find that the benefits of such dynamic rule are even more pronounced when the set of available policies is augmented with the proposed mean-variance portfolios.

Keywords: Bond indexing; Dynamic policy selection; Kalman filter; Out-of-sample evaluation; Portfolio optimization; Yield curve forecasts (search for similar items in EconPapers)
JEL-codes: C53 E43 G17 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:37:y:2016:i:c:p:128-158

DOI: 10.1016/j.jempfin.2016.03.004

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