Quantitative Management of Bond Portfolios

by Dynkin, Lev

• ISBN13: 9780691128313
• ISBN10: 0691128316
• Format: Hardcover
• Copyright: 2006-10-09
• Publisher: Princeton Univ Pr

Summary

The practice of institutional bond portfolio management has changed markedly since the late 1980s in response to new financial instruments, investment methodologies, and improved analytics. Investors are looking for a more disciplined, quantitative approach to asset management. Here, five top authorities from a leading Wall Street firm provide practical solutions and feasible methodologies based on investor inquiries. While taking a quantitative approach, they avoid complex mathematical derivations, making the book accessible to a wide audience, including portfolio managers, plan sponsors, research analysts, risk managers, academics, students, and anyone interested in bond portfolio management. The book covers a range of subjects of concern to fixed income portfolio managers--investment style, benchmark replication and customization, managing credit and mortgage portfolios, managing central bank reserves, risk optimization, and performance attribution. The first part contains empirical studies of security selection versus asset allocation, index replication with derivatives and bonds, optimal portfolio diversification, and long-horizon performance of assets. The second part covers portfolio management tools for risk budgeting, bottom-up risk modeling, performance attribution, innovative measures of risk sensitivities, and hedging risk exposures. A first-of-its-kind publication from a team of practitioners at the front lines of financial thinking, this book presents a winning combination of mathematical models, intuitive examples, and clear language.

Author Biography

The authors are with the Lehman Brothers Quantitative Portfolio Strategies Group. Lev Dynkin is a Managing Director and the Group's founder and Global Head. Anthony Gould, Jay Hyman, and Vadim Konstantinovsky are Senior Vice Presidents. Bruce Phelps is a Managing Director.

Table of Contents

Foreword by Steve Ross	ix
Acknowledgments	xi
Note on Authorship	xiii
Introduction	xv
PART I Empirical Studies of Portfolio Strategies and Benchmark Design
EVALUATING INVESTMENT STYLE	3	(118)
1. Value of Security Selection vs. Asset Allocation in Credit Markets	9	(43)
2. Value of Skill in Macro Strategies for Global Fixed-Income Investing	52	(57)
3. Cost of the No-Leverage Constraint in Duration Timing	109	(12)
INDEX REPLICATION	121	(114)
4. Replicating the Lehman Brothers U.S. Aggregate Index with Liquid Instruments	133	(30)
5. Replicating the Lehman Brothers Global Aggregate Index with Liquid Instruments	163	(25)
6. Tradable Proxy Portfolios for the Lehman Brothers MBS Index	188	(27)
7. High Yield Index Replication	215	(10)
8. CMBS Index Replication	225	(10)
BENCHMARK CUSTOMIZATION	235	(118)
9. Evaluating Performance of Long-Horizon Portfolios	241	(42)
10. Liability-Based Benchmarks: An Example	283	(11)
11. Swap Indices	294	(23)
12. Benchmarks for Asset-Swapped Portfolios	317	(10)
13. Issuer-Capped and Downgrade-Tolerant U.S. Corporate Indices	327	(26)
MANAGING CREDIT PORTFOLIOS	353	(146)
14. Sufficient Diversification in Credit Portfolios	363	(47)
15. Return Performance of Investment-Grade Bonds after Distress	410	(20)
16. Optimal Credit Allocation for Buy-and-Hold Investors	430	(35)
17. A Quick Look at Index Tails	465	(10)
18. Are Credit Markets Globally Integrated?	475	(24)
MANAGING MORTGAGE PORTFOLIOS	499	(80)
19. Managing against the Lehman Brothers MBS Index: Prices and Returns	503	(16)
20. Evaluating Measures of MBS Duration	519	(37)
21. MBS Investing over Long Horizons	556	(23)
MANAGING CENTRAL BANK RESERVES	579	(52)
22. Total Return Management of Central Bank Reserves	583	(38)
23. The Prospects of Negative Annual Total Returns in Short-Duration Treasury Benchmarks	621	(10)
PART II Portfolio Management Tools
OPTIMAL RISK BUDGETING WITH SKILL	631	(46)
24. Effect of Security Selection Skill on Optimal Sector Allocation	641	(14)
25. Risk Budget Allocation to Issuer and Sector Views	655	(22)
MULTIFACTOR RISK MODELING AND PERFORMANCE ATTRIBUTION	677	(134)
26. The Global Risk Model: A Portfolio Manager's Guide	681	(107)
27. The Hybrid Performance Attribution Model	788	(23)
PORTFOLIO AND INDEX ANALYTICS	811	(148)
28. Insights on Duration and Convexity	817	(8)
29. Portfolio Yields and Durations	825	(17)
30. Computing Excess Return of Spread Securities	842	(12)
31. Currency-Hedged Returns in Fixed-Income Indices	854	(8)
32. The Bund-Treasury Trade in Portfolios	862	(9)
33. Empirical Duration of Credit Securities	871	(17)
34. Duration Times Spread: A New Measure of Spread Risk for Credit Securities	888	(47)
35. Hedging Debt with Equity	935	(24)
Index	959