Portfolio selection of bonds with interest rate swaps--a mean-variance approach.
Item
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Title
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Portfolio selection of bonds with interest rate swaps--a mean-variance approach.
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Identifier
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AAI9108100
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identifier
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9108100
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Creator
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Fang, Zhenmin.
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Contributor
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Adviser: Harry Markowitz
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Date
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1990
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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Following the Markowitz general portfolio selection model in 1987, portfolio selection models of bonds without and with interest rate swaps are developed separately. A two factor model is used to obtain the variance-covariance matrix of portfolio returns as a whole without and with interest rate swaps. In both cases, the variance-covariance matrices of portfolio returns as a whole are assumed to be diagonal. Since interest rate swaps are designed to exchange a series of interest payments without exchanging the underlying principal, the proportionate holdings of nonmarketable assets and liabilities can be changed as if they are traded in the market. Thus optimal portfolios can always be achieved.;Using data from the CRSP U.S. Government Bond Tape, the two factor model is used to obtain the variance-covariance matrix of bond portfolio returns as a whole without interest rate swaps. Empirical evidence shows that the two factor model explains most of the variations of bond portfolio returns and performs better than the single factor model. Using the critical line algorithm developed by Markowitz, the optimal portfolios of bonds without interest rate swaps are determined consistent with the mean-variance theory. With nonmarketable assets in the bond portfolios, the optimal portfolios will be less efficient.;Using data from the "International Financing Review", returns of swaps and swap generated-notes are obtained and the variance-covariance matrix of returns with swaps is estimated. Using the critical line algorithm again, the optimal portfolios of bonds with interest rate swaps are calculated. Empirical evidence shows that: (1) Interest rate swaps can be used to reallocate the nonmarketable bonds in the portfolio selection process; (2) The efficient frontier with interest rate swaps will shift up significantly if the underlying bond portfolios of real principal have longer maturities and higher risk exposures; (3) If the underlying bond portfolios of real principal have shorter maturities and lower risk exposures, the shifting of efficient frontier with interest rate swaps will be less significant.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
