Decomposing risks in bond portfolios: International evidence

David Sun, Shih Chuan Tsai, Chun Da Chen

Research output: Contribution to journalArticle

Abstract

This study recalibrates corporate bond idiosyncratic risks in an international context. By applying a statistically powerful risk decomposition scheme, the authors show that diversification is significantly improved by the addition of a global risk benchmark. They construct a longrun stationary yield spread decomposition scheme that further provides a better diversification effect. In addition to global liquidity and default risk factors, a countryspecific default risk component is included, and all of them are free of measurement or availability issues. The idiosyncratic risk component is estimated as a fixed effect along with all the parameter estimates, rather than separately from an exogenous generating process. The linear model is simple, yet it can be easily and promptly applied by practitioners.

Original languageEnglish
Pages (from-to)75-93
Number of pages19
JournalJournal of Fixed Income
Volume26
Issue number1
DOIs
Publication statusPublished - 2016 Jun 1

Fingerprint

Bond portfolio
Decomposition
Default risk
Idiosyncratic risk
Diversification
Yield spread
Corporate bonds
Liquidity risk
Benchmark
Risk factors
Fixed effects

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Decomposing risks in bond portfolios : International evidence. / Sun, David; Tsai, Shih Chuan; Chen, Chun Da.

In: Journal of Fixed Income, Vol. 26, No. 1, 01.06.2016, p. 75-93.

Research output: Contribution to journalArticle

Sun, David ; Tsai, Shih Chuan ; Chen, Chun Da. / Decomposing risks in bond portfolios : International evidence. In: Journal of Fixed Income. 2016 ; Vol. 26, No. 1. pp. 75-93.
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