• Dependence and Risk Management

    The basics of quantitative portfolio selection

    The seminal work of Harry Markowitz from the 1950s is the first scientific approach towards portfolio selection based on the idea of diversification, constituting a quantitative setup whose core ideas are still prominent in today’s financial industry. The content of the present article consists of three parts. First, the Markowitz theory is summarized, with an emphasis on its relation with the concept of the Sharpe ratio. Second, its limitations and potential generalizations are discussed. Third, it is demonstrated in the particular case of our fund XAIA Credit Curve Carry how the related concept of Sharpe ratio maximization can assist with managing daily portfolio adjustments.

     

     

    PDF
  • Credit Derivatives

    [in German only] Die Berechnung der negativen Basis anschaulich erläutert

    [in German only] In einem früheren Artikel haben wir im Rahmen eines idealisierten, einfachen Kreditrisiko-Bewertungsmodells eine wissenschaftlich fundierte Definition für den Begriff der negativen Basis eingeführt. Im vorliegenden Artikel rekapitulieren wir die zugrundeliegende Logik noch einmal in einfach verständlicher Weise. Insbesondere demonstrieren wir die Mechanik des Modells anhand von einfachen Beispielen.

    PDF
  • Dependence and Risk Management

    Portfolio optimization for credit-risky assets under extreme dependence

    We consider power utility maximization in a multivariate Black-Scholes model that is enhanced by credit risk via the Marshall-Olkin exponential distribution. On the practical side, the model is analytically tractable, easy to interpret, and thus simple to implement. On the theoretical side, the model constitutes a well-justified and intuitive mathematical wrapping to study the effect of extreme and higher-order dependence on optimal portfolios. In particular, we show that it is rich enough to model both, situations in which diversification is beneficial and situations in which this is not the case.

     

     

    more
  • Equity Derivatives

    Improved analytical proxy formulas for convertible bonds

    In a previous article, we derived a sharp analytical lower bound for the price of a convertible bond. When a soft call covenant was present, a lower bound could only be derived in a simple credit-equity model, and two simplifying assumptions were made: (1) the soft call right may be executed at any time, starting at time t=0, and (2) the bond and its underlying equity are denominated in the same currency. This addendum summarizes the necessary adjustments to the formula in order to get rid of these restrictive assumptions.

     

     

    PDF
  • Equity Derivatives

    Integrated convertibles - Investment styles and characteristics integration applied to convertible bonds

    This article explores six investment styles like momentum, value, defensive and others in the niche asset class of US convertible bonds. While only carry and a characteristics integration approach yield promising results, it seems that both strategies can be explained by common equity and bond market factors. Thus, the case of characteristics investing in convertible bonds is not as strong as in other more traditional asset classes. However, convertible bond characteristics integration provides an interesting opportunity to get exposure to equity and bond markets as well as to multiple characteristics at once.

     

     

    PDF