TY - JOUR T1 - Optimal Leveraging of Fixed Income Portfolios with Interest Rate Structured Products JF - The Journal of Fixed Income SP - 16 LP - 25 DO - 10.3905/jfi.2007.688962 VL - 17 IS - 1 AU - Mathieu Dieudonné AU - Jean-Christophe Curtillet Y1 - 2007/06/30 UR - https://pm-research.com/content/17/1/16.abstract N2 - Interest rate structured products are often described as useful leveraging and diversification instruments for fixed income investors. However, the question of which structured products should be used in practice to optimally leverage a fixed income portfolio, as well as the optimal combination of these products, is often left unanswered. In this article, we tackle this issue for buy-and-hold investors with various investment horizons. For that purpose, we introduce a stochastic curve model based on two correlated Vasicek processes to estimate the joint probability distribution of the average coupons of several interest rate structured products. Neglecting reinvestment of coupon payments, the distribution of the average coupons can be used to approximate the joint distribution of returns over the entire investment period. Assuming an investor whose preferences can be described in terms of expected return and return volatility, we resort to Markowitz/Tobin's framework to optimally leverage a portfolio of fixed-coupon bonds with interest rate structured products. We show that there exists an optimal combination of structured products in which investors should invest when leveraging a fixed income portfolio.TOPICS: Fixed income and structured finance, portfolio construction ER -