Price and market risk reduction for bond portfolio selection in BRICS markets

  • Received October 9, 2017;
    Accepted February 12, 2018;
    Published February 20, 2018
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.15(1).2018.11
  • Article Info
    Volume 15 2018, Issue #1, pp. 120-131
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This paper focuses on classical portfolio strategies applied to five countries, which are Brazil, Russia, India, China and South Africa. These five countries form the so-called BRICS group. In particular, the authors investigate their corporate and sovereign bond market and evaluate whether these markets can represent a profitable investment for non-satiable and risk-averse investors. Two-step optimization is proposed to control price risk and market risk. For price risk management, classical immunization strategies and are obtained funds of bond are obtained that share the same risk measure. For market risk control, the previously found funds are used and a performance measure optimization commonly used in stock markets is applied to define the best portfolio of funds. Therefore, the resulting optimal portfolio controls the price risk and jointly maximizes a desired performance measure that includes the market risk. Finally, the authors propose an empirical analysis to evaluate the profitability of the suggested two-step optimization for the five BRICS countries and compare the ex-post sample paths of the obtained portfolios for testing the stochastic dominance relations.

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    • Figure 1. Ex-post wealth on Brazilian bond portfolios after first phase (October 2011–April 2015)
    • Figure 2. Ex-post wealth on Russian bond portfolios after first phase (May 2011–April 2015)
    • Figure 3. Ex-post wealth on Indian bond portfolios after first phase (May 2011–April 2015)
    • Figure 4. Ex-post wealth on Chinese bond portfolios after first phase (May 2011–April 2015)
    • Figure 5. Ex-post wealth on South African bond portfolios after first phase (May 2011–April 2015)
    • Figure 6. Ex-post wealth on Brazilian bonds after second phase
    • Figure 7. Ex-post wealth on Russian bonds after second phase
    • Figure 8. Ex-post wealth on Indian bonds after second phase
    • Figure 9. Ex-post wealth on Chinese bonds after second phase
    • Figure 10. Ex-post wealth on South African bonds
    • Table 1. Dominance relations between the strategies in different countries