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The Journal of Fixed Income

The Journal of Fixed Income

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Article

Bond Portfolio Optimization in the Presence of Duration Constraints

Romain Deguest, Frank Fabozzi, Lionel Martellini and Vincent Milhau
The Journal of Fixed Income Summer 2018, 28 (1) 6-26; DOI: https://doi.org/10.3905/jfi.2018.1.061
Romain Deguest
is head of research and co-founder of Fundvisory in Paris, France. rdeguest@yahoo.fr
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Frank Fabozzi
is a professor of finance at EDHEC Business School in Nice, France. frank.fabozzi@edhec-risk.com
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Lionel Martellini
is professor of finance at the EDHEC Business School and the Director of EDHEC-Risk Institute in Nice, France. lionel.martellini@edhec.edu
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Vincent Milhau
is research director at EDHEC-Risk Institute in Nice, France. vincent.milhau@edhec.edu
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Abstract

Although there exists an abundant literature on the benefits and limits of scientific diversification in the equity universe, little is known about the out-of-sample performance of portfolio optimization models in the fixed-income universe. In this article, the authors address two key challenges that are specific to bond portfolio optimization, namely, the presence of duration constraints and the presence of no-arbitrage restrictions on risk parameter estimates, for which no equivalent exists in the equity universe. In an application to sovereign bonds in the eurozone, they find that the use of portfolio optimization techniques based on robust estimators for risk parameters generates an improvement in investor welfare compared with the use of ad hoc bond benchmarks such as equally weighted or cap-weighted portfolios. These results are robust with respect to changes in the number of constituents in the portfolio and the rebalancing period, and in the presence of duration or weight constraints.

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The Journal of Fixed Income: 28 (1)
The Journal of Fixed Income
Vol. 28, Issue 1
Summer 2018
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Bond Portfolio Optimization in the Presence of Duration Constraints
Romain Deguest, Frank Fabozzi, Lionel Martellini, Vincent Milhau
The Journal of Fixed Income Jun 2018, 28 (1) 6-26; DOI: 10.3905/jfi.2018.1.061

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Bond Portfolio Optimization in the Presence of Duration Constraints
Romain Deguest, Frank Fabozzi, Lionel Martellini, Vincent Milhau
The Journal of Fixed Income Jun 2018, 28 (1) 6-26; DOI: 10.3905/jfi.2018.1.061
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  • Article
    • Abstract
    • BOND PORTFOLIO OPTIMIZATION
    • CONSISTENT RISK PARAMETER ESTIMATORS FOR BOND PORTFOLIOS
    • EMPIRICAL ANALYSIS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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