Robustness of bond portfolio optimisation

 

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dc.contributor.advisor Backwell, Alex en_ZA
dc.contributor.advisor Ouwehand, Peter en_ZA
dc.contributor.author Pillay, Divanisha en_ZA
dc.date.accessioned 2016-07-26T12:18:29Z
dc.date.available 2016-07-26T12:18:29Z
dc.date.issued 2016 en_ZA
dc.identifier.citation Pillay, D. 2016. Robustness of bond portfolio optimisation. University of Cape Town. en_ZA
dc.identifier.uri http://hdl.handle.net/11427/20783
dc.description.abstract Korn and Koziol (2006) apply the Markowitz (1952) mean-variance framework to bond portfolio selection by proposing the use of term structure models to estimate the time-varying moments of bond returns. Duffee (2002) introduces a distinction between completely affine and essentially affine term structure models. A completely affine model uses a market price of risk specification that is proportional to the volatility of the risk factors. However, this assumption of proportionality of the market price of risk contradicts the observed behaviour of bond returns. In response, Duffee (2002) introduces a more flexible essentially affine market price of risk specification by breaking the strict proportionality of the completely affine specification. Essentially affine models better represent the empirical features of bond returns whilst preserving the tractability of completely affine models. However, Duffee and Stanton (2012) find that the increased flexibility of the essentially affine model comes at the expense of real-world parameter estimation. Given these parameter estimation issues, this dissertation investigates whether the difficulty in estimating an essentially affine specification is outweighed by the empirical preferability, and whether, all these issues considered, the Markowitz (1952) approach to bond portfolio optimisation is robust. The results indicate that the superior capability of an essentially affine model to forecast expected returns outweighs real-world parameter estimation issues; and that the estimation and mean-variance optimisation procedures are worthwhile. en_ZA
dc.language.iso eng en_ZA
dc.subject.other Mathematical Finance en_ZA
dc.title Robustness of bond portfolio optimisation en_ZA
dc.type Master Thesis
uct.type.publication Research en_ZA
uct.type.resource Thesis en_ZA
dc.publisher.institution University of Cape Town
dc.publisher.faculty Faculty of Commerce en_ZA
dc.publisher.department Division of Actuarial Science en_ZA
dc.type.qualificationlevel Masters
dc.type.qualificationname MPhil en_ZA
uct.type.filetype Text
uct.type.filetype Image
dc.identifier.apacitation Pillay, D. (2016). <i>Robustness of bond portfolio optimisation</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/20783 en_ZA
dc.identifier.chicagocitation Pillay, Divanisha. <i>"Robustness of bond portfolio optimisation."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016. http://hdl.handle.net/11427/20783 en_ZA
dc.identifier.vancouvercitation Pillay D. Robustness of bond portfolio optimisation. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/20783 en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Pillay, Divanisha AB - Korn and Koziol (2006) apply the Markowitz (1952) mean-variance framework to bond portfolio selection by proposing the use of term structure models to estimate the time-varying moments of bond returns. Duffee (2002) introduces a distinction between completely affine and essentially affine term structure models. A completely affine model uses a market price of risk specification that is proportional to the volatility of the risk factors. However, this assumption of proportionality of the market price of risk contradicts the observed behaviour of bond returns. In response, Duffee (2002) introduces a more flexible essentially affine market price of risk specification by breaking the strict proportionality of the completely affine specification. Essentially affine models better represent the empirical features of bond returns whilst preserving the tractability of completely affine models. However, Duffee and Stanton (2012) find that the increased flexibility of the essentially affine model comes at the expense of real-world parameter estimation. Given these parameter estimation issues, this dissertation investigates whether the difficulty in estimating an essentially affine specification is outweighed by the empirical preferability, and whether, all these issues considered, the Markowitz (1952) approach to bond portfolio optimisation is robust. The results indicate that the superior capability of an essentially affine model to forecast expected returns outweighs real-world parameter estimation issues; and that the estimation and mean-variance optimisation procedures are worthwhile. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - Robustness of bond portfolio optimisation TI - Robustness of bond portfolio optimisation UR - http://hdl.handle.net/11427/20783 ER - en_ZA


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