Do Leveraged Credit Derivatives Modify Credit Allocation?

Jean-François Boulier, Marie Brière () and Jean-Renaud Viala

No 08-014.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This paper examines how credit derivatives have changed the construction of an efficient portfolio. Credit derivatives provide a way of gaining exposure to credit risk alone, to the exclusion of interest rate risk. They also permit a relatively easy use of leverage. We examine two types of allocation: the first is a conventional investment in government bonds, corporate bonds (investment grade and high yield) and equities in the United States; the second replaces corporate bonds with credit derivatives, which may also be leveraged. We look at past data on returns, risk and correlations of these investments, and we show that the credit risk component seems to have a strongly diversifying effect relative to the traditional asset classes, i.e. equities and government bonds. We then compute efficient frontiers within a standard mean-variance framework. The results show the advantages of credit derivatives for portfolio diversification, and the usefulness of leveraging this investment to extend the limits of the efficient frontier.

Pages: 18 p.
Date: 2008
References: Add references at CitEc
Citations:

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/5430 ... ol_wpaper_08-014.pdf RePEc_sol_wpaper_08-014 (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:sol:wpaper:08-014

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... ulb.ac.be:2013/54301

Access Statistics for this paper

More papers in Working Papers CEB from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().