Capturing the Correlations of Fixed-income Instruments

John M. Mulvey and Stavros Zenios
Additional contact information
John M. Mulvey: Statistics and Operations Research, Princeton University, Princeton, New Jersey 08544

Management Science, 1994, vol. 40, issue 10, 1329-1342

Abstract: This paper develops a framework for managing portfolios of fixed income instruments based on traditional principles from the equities market, i.e., based on diversification. It shows, through an analysis of the high-yield bond market over the period 1987 to 1991, that fixed-income prices could be highly correlated. These correlations can be quantified and integrated, in a systematic way, in an asset/liability management framework. For vanishing fixed income securities, however, we cannot resort to statistical analysis of historical data in order to quantify correlations. The paper develops a forward-looking simulation procedure for capturing correlations. Applications are illustrated for examples from high-yield bonds and mortgage-backed securities. The superiority of the proposed approach over the traditional portfolio immunization techniques is demonstrated in the context of funding an insurance liability stream with mortgage instruments.

Keywords: stochastic optimization; finance; portfolio optimization (search for similar items in EconPapers)
Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.40.10.1329 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:40:y:1994:i:10:p:1329-1342

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().