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- Title
On the Diversification of Fixed Income Assets.
- Authors
Le Courtois, Olivier
- Abstract
This article introduces a new approach for dealing with the diversification/concentration risk of fixed income assets. Because Government bonds, corporate bonds, and mortgage backed securities constitute a large proportion of the assets of institutional investors in most countries, it is important to be able to determine the number of lines/issuers of such assets, not only for portfolio management but also for risk management purposes. The approach that I introduce shows the dependence of the critical number of lines of fixed income assets on the main interest rate risk and credit risk drivers. Specifically, I examine the importance of volatility risk, force of mean reversion, default risk, recovery risk, and default dependence risk on the critical number of assets in a fixed income portfolio. The methodology in this paper relies on the use of the coefficient of variation for the computation of the critical number of credit-sensitive securities in a fixed income portfolio. To the best of my knowledge, this paper is the first to develop such an approach.
- Subjects
FIXED incomes; COUNTERPARTY risk; MORTGAGE-backed securities; FIXED-income securities; INTEREST rate risk; ASSETS (Accounting)
- Publication
Risks, 2022, Vol 10, Issue 2, p31
- ISSN
2227-9091
- Publication type
Article
- DOI
10.3390/risks10020031