Robustness of bond portfolio optimisation

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dc.contributor.advisorBackwell, Alexen_ZA
dc.contributor.advisorOuwehand, Peteren_ZA
dc.contributor.authorPillay, Divanishaen_ZA
dc.date.accessioned2016-07-26T12:18:29Z
dc.date.available2016-07-26T12:18:29Z
dc.date.issued2016en_ZA
dc.description.abstractKorn 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.identifier.apacitationPillay, 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/11427/20783en_ZA
dc.identifier.chicagocitationPillay, 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/11427/20783en_ZA
dc.identifier.citationPillay, D. 2016. Robustness of bond portfolio optimisation. University of Cape Town.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
dc.identifier.urihttp://hdl.handle.net/11427/20783
dc.identifier.vancouvercitationPillay 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/11427/20783en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleRobustness of bond portfolio optimisationen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMPhilen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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