PT - JOURNAL ARTICLE AU - Dexiang Wu AU - Desheng Dash Wu TI - A Robust Decision Support Approach to Portfolio Risk Reduction Based on Credit Default Swap AID - 10.3905/jfi.2018.27.3.086 DP - 2017 Dec 31 TA - The Journal of Fixed Income PG - 86--95 VI - 27 IP - 3 4099 - https://pm-research.com/content/27/3/86.short 4100 - https://pm-research.com/content/27/3/86.full AB - We construct portfolios from the credit default swap (CDS) market by incorporating cardinality and solvency constraints into mean-variance and conditional value at risk (CVaR) models. Cardinality constraints are applied to limit the portfolio size and improve the allocation structure, while the solvency constraint is used to insulate the default risks of the portfolios under worst scenarios. CDS-based portfolios involve uncertainties that stem from spread changing and jump-to-default volatilities. We show that these uncertainties can be identified and managed using our developed systematic approach. Market data analysis from the CDS portfolios shows that using cardinality constraints reduces counterparty risks significantly. The proposed cardinality constrained CVaR model has robust performance in terms of the portfolio Sharpe ratio and one other metric, and also generally outperforms the associated mean-variance strategy.TOPICS: CLOs, CDOs, and other structured credit, portfolio management/multi-asset allocation, VAR and use of alternative risk measures of trading risk