A Factor Allocation Approach to Optimal Bond Portfolio (Revised in March 2008, Published in "Asia-Pacific Financial Markets", Vol.14-4, 299-324, 2007. )

Keita Nakayama and Akihiko Takahashi
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Keita Nakayama: Graduate School of Economics, University of Tokyo
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CARF-F-076, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a new method to a bond portfolio problem in a multi-period setting. In particular, we apply a factor allocation approach to constructing the optimal bond portfolio in a class of multi-factor Gaussian yield curve models. In other words, we consider a bond portfolio problem in terms of a factors' allocation problem. Thus, we can obtain clear interpretation about the relation between the change in the shape of a yield curve and dynamic optimal strategy, which is usually hard to be obtained due to high correlations among individual bonds. We first present a closed form solution of the optimal bond portfolio in a class of the multi-factor Gaussian term structure model. Then, we investigate the effects of various changes in the term structure on the optimal portfolio strategy through series of comparative statics.

Pages: 34 pages
Date: 2006-10
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf076

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