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A0890
Title: Multi-period bond portfolio optimization by linear rebalancing strategy utilizing a stochastic interest rate model Authors:  Yoshiyuki Shimai - University of Tsukuba (Japan) [presenting]
Naoki Makimoto - University of Tsukuba (Japan)
Abstract: Regardless of the asset class, it is difficult to apply multi-period dynamic portfolio optimization to real investment activity due to theoretical and structural complexity. In particular, when it comes to a bond portfolio based on a stochastic interest rate model, no empirical studies are analyzing the actual bond market. However, there exists some literature which focuses on theoretical aspects of multi-period bond portfolio optimization, such as deriving analytical solutions for optimal portfolios. Besides, a methodology to take into account realistic investment constraints has not yet been developed. We propose a new framework for multi-period bond portfolio optimization. Because bond return can be expressed as a linear combination of factors which constitute a stochastic interest rate model, we apply a linear rebalancing strategy that takes into account transaction costs in addition to self-financing constraints and short-selling constraints. Then, as empirical analysis, we conduct an investment back-test analyzing discount bonds estimated from Japanese interest-bearing government bonds. As a result, we found that the multi-period portfolio optimization represents relatively high performance compared to the single-period optimization and that the performance improves as the investment horizon and investment utilization period are extended up to a certain point.