ASSET ALLOCATION WITH CREDIT INSTRUMENTS

Barbara Menzinger, Anna Schlösser and Rudi Zagst
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Barbara Menzinger: risklab GmbH, Seidlstr. 24-24a, 80335 Munich, Germany
Anna Schlösser: risklab GmbH, Seidlstr. 24-24a, 80335 Munich, Germany
Rudi Zagst: HVB-Stiftungsinstitut für Finanzmathematik, Technische Universität München, Parkring II, 85748 Garching, Germany

Chapter 7 in Alternative Investments and Strategies, 2010, pp 147-173 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis chapter presents a consistent, scenario-based asset allocation framework for analyzing traditional financial instruments and credit instruments in a portfolio context. Our framework accounts for the distinct return characteristics of credit instruments by incorporating potential defaults into the total return calculation. We generate correlated default times with a Normal Inverse Gaussian one-factor copula. To determine optimal portfolios, we use a mean-variance and a conditional value at risk optimization. Performing a case study for the U.S. market, we find that the mean-variance optimization overestimates the benefits of low-rated credit instruments. Though, optimal portfolios always contain a considerable proportion of credit instruments.

Keywords: Alternative Investments; Portfolio Selection; Trading Strategy; Product Innovations; CPPI; Portfolio Optimization; Portfolio Insurance (search for similar items in EconPapers)
Date: 2010
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