RT Journal Article
SR Electronic
T1 Bond Portfolio Optimization in the Presence of Duration Constraints
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2018.1.061
DO 10.3905/jfi.2018.1.061
A1 Romain Deguest
A1 Frank Fabozzi
A1 Lionel Martellini
A1 Vincent Milhau
YR 2018
UL https://pm-research.com/content/early/2018/06/11/jfi.2018.1.061.abstract
AB 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, we 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, we 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.