Diversifying Risks in Bond Portfolios: A Cross-border Approach

David Sun and Shih-Chuan Tsai

MPRA Paper from University Library of Munich, Germany

Abstract: This study recalibrates corporate bond idiosyncratic risks in an international context. Applying a statistically powerful risk decomposition scheme, we show in this study that diversification is improved by the addition of a global risk benchmark. We build a long-run stationary yield spread decomposition scheme which provides better diversification effect. In addition to global liquidity and default risk factors, we also include country-specific default risk component, and all of them are free of measurement or availability issues. The idiosyncratic risk component is estimated as a fixed effect along with all the parameter estimates, rather than separately from an exogenous generating process. Our linear model is simple, yet it can be easily and promptly applied by practitioners.

Keywords: bond pricing; credit spread; systematic risk; diversification; global risk; heterogeneous panel; pooled mean group. (search for similar items in EconPapers)
JEL-codes: F34 F65 G12 G15 (search for similar items in EconPapers)
Date: 2013-12-14, Revised 2014-01-09
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:44767

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