Bond Portfolio Investing and Risk Management: Forew. by Mohamed El-Erian - Hardcover

Bhansali, Vineer

Hardcover

ISBN 10: 0071623701 ISBN 13: 9780071623704

Verlag: McGraw-Hill Education Ltd, 2010

Inhaltsangabe

"Excess returns or yields do not come without risk. Bond Portfolio Investing and Risk Management delves comprehensively, but intuitively, into the various risk factors and delivers the tools to understand, measure, control, and take advantage of risk premiums in practical fixed income investing. As the financial crisis has made all too clear, this book's unifying treatment of risk and return is essential for all bond investors." -- Andrew Ang, Ann F. Kaplan Professor of Business, Columbia Business School "This moves instantly to the top of my recommended list of important reading for concept-oriented fixed income investors. Profit by learning how a true expert makes risk-return trade-offs when constructing portfolios of bonds and related derivatives." -- Darrell Duffie, Dean Witter Distinguished Professor of Finance, Graduate School of Business, Stanford University "Vineer Bhansali combines the mathematical rigor of a trained physicist with the commonsense wisdom of a school-of-hard-knocks practitioner to deliver a unique prism into the world of bond investment and risk management post the Financial Crisis. The book is not just valuable, but extremely timely. You won't want to read it quickly, but slowly and thoughtfully, as it is an analytical mosaic, not simply a well-written narrative, even though it is indeed that. Bravo, Vineer!" -- Paul McCulley, Managing Director, PIMCO "Drawing on his years of experience as a portfolio manage, his knowledge of and contributions to the academic literature, and his quantitative training, Bhansali bridges the gap between book knowledge and the practicalities of successful, long-term investing. By focusing attention on big-picture questions that are often forgotten in the course of portfolio 'optimization'--Which options are you short? Who else is in the trade? What will happen in a liquidity-stress scenario?--this book will help asset managers to improve the risk-return characteristics of their portfolios and to avert disasters." -- Bruce Tuckman, author of Fixed Income Securities and Director of Financial Markets Research, Center for Financial Stability "Fixed-income markets used to be peaceful and quiet, but the last several years have shown that these markets can be a little too exciting from time to time, and in this wonderful volume, Vineer Bhansali has done a masterful job of telling us how to deal with this new fixed-income world. With a Ph.D. in particle physics and enormous practical experience in the markets, Dr. Bhansali is uniquely qualified to help investors and portfolio managers navigate through the choppy waters that will likely characterize the financial system for the next several years." -- Andrew W. Lo, Director, Laboratory for Financial Engineering, MIT Sloan School of Management About the Book Bond Portfolio Investing and Risk Management helps you build portfolios to add value through every kind of economic cycle. Sharing his years of experience constructing robust, wellperforming portfolios that have navigated recurring crises, PIMCO portfolio manager Vineer Bhansali explores the various risk factors inherent in fixed income investments, including yield curve shifts, twists, liquidity, and evolving risk factors such as government policy. Under an option-theory based riskand- return framework, you will gain intimate knowledge of the right valuation, investment, and risk management tools and confidently put them to use in practical portfolio construction. Basing his conclusions on his own expertise and the latest academic and practitioner research, Bhansali provides valuable insight into topics you would be hard-pressed to find elsewhere, such as: Option-based building blocks to valuation Measuring liquidity and stress risks Asset selection and risk factors Building state-of-the-art macro models Ine

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Über die Autorin bzw. den Autor

Vineer Bhansali, Ph.D., managing director and portfolio manager at PIMCO, oversees PIMCO's quantitative investment portfolios. Prior to joining PIMCO, he was a proprietary trader in the fixed-income trading group at Credit Suisse First Boston and in the fixed-income arbitrage group at Salomon Brothers in New York, and he served as head of the exotic and hybrid options trading desk at Citibank New York. The author of Pricing and Managing Exotic and Hybrid Options and Fixed Income Finance: A Quantitative Approach, he serves as an associate editor for the International Journal of Theoretical and Applied Finance. He received his Ph.D. in theoretical physics from Harvard University in 1992 and his bachelor's and master's degrees in physics and engineering and applied sciences from Caltech in 1987. Bhansali lives in Laguna Beach, CA.

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Bond Portfolio Investing and Risk Management

POSITIONING FIXED INCOME PORTFOLIOS FOR ROBUST RETURNS AFTER THE FINANCIAL CRISISBy VINEER BHANSALI

The McGraw-Hill Companies, Inc.

Copyright © 2010 The McGraw-Hill Companies, Inc.
All right reserved.
ISBN: 978-0-07-162370-4

Contents

Chapter One

Risk and Total Return

"There is nothing new under the sun but there are lots of old things we don't know."

—Ambrose Bierce, The Devil's Dictionary, U.S. author and satirist, 1842–1914

The financial world changed in 2008. Many brokers become banks, and a large portion of the global financial system is owned or controlled by governments. Many fixed income markets that were "rates" markets, such as municipals, have become "credit" markets, and many credit markets have disappeared into a morass of defaults. What is an author supposed to do to relay principles of fixed income when the best he can do is to take a snapshot of a path-dependent process that is transmogrifying every day? Consider the yield on Treasury bills:

U.S. One-Month Bill Rate Negative for First Time Since December 2009-03-26 14:04:13.765 GMT

By Dave Liedtka, March 26 (Bloomberg)—Treasury one-month bill rates were negative for the first time since Dec. 26. The rate on the one-month bill was negative 0.0152 percent in New York, compared with 0.03 percent yesterday.

The only reason a person would accept a negative return and part with his or her money would be if the holding of the asset conferred some risk- mitigating benefit to the holder. In the case of the T-bill with negative yields, this benefit was the protection of capital. Investors were so scared of not getting their principal back that they were willing to give up return on their principal (actually they were willing to pay the federal government to keep their money safe).

The reason I start with this example is because return cannot be separated from risk. Unless a fixed income investor understands the inherent risks of an investment, it makes little difference where the return is coming from. To understand risks, we build models. Models are simply analytical tools that make sense, and they should not be confused with mathematical symbols or computational ability.

Model builders have lots of choices. What differentiates a good model from a bad model? My view is that it is the relevance to the markets and the ability to be robust to structural changes. A Wall Street trading desk that intermediates risk between two different counterparties uses its models as an inventory management system for important risks that do not impact the bottom line for short time intervals. So the models can be relatively simple and coarse. At the same time, a proprietary desk for the same dealer requires a more sophisticated set of models, especially if derivatives are involved, to ensure that there is no mispricing between similar or fungible assets. An asset manager who holds securities for longer time horizons requires even more truth in the models used because most of the reward for holding risks is through the risk premium realized. Valuation of risk premia, which is ignorable for a short-term trading desk, is the key issue for longer-term holders of risk. So, while a short-term trading desk can get away with risk-neutral valuation, another way of saying that the market is efficient in the short term, longer-term holders of securities and risk can hardly exploit short-term mispricing. For investors, the class that covers most of us, it is more important to be able to position portfolios to take advantage of risk premia than to arbitrage short-term mispricing.

To understand risk premia, we need to understand risks. A convenient way to describe the risks of securities is by using risk factors. For any security, we can postulate that the return is proportional to the return on some factors, and the exposure of the security to those factors, plus some idiosyncratic return. In other words, let us assume that we can write the returns of a security r_i as

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (1.1)

where the N variables labeled f_i ... f_N are the return on the fundamental variables we call factors that can influence the price of the security. Typically, we also impose the condition that the expected value of the noise term is zero, that is, E (ε_i) = 0, and that the factor movements are orthogonal to the noise term.

Now suppose that the mean return on the asset is [bar.r_i]. Then the excess return is r_i - [bar.r_i] and can be written in terms of the excess factor returns:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (1.2)

As long as the factor set is complete, this equation holds true for all assets. In this chapter we will identify and explore the factors that are relevant to the management of fixed income portfolios. Since the excess returns on securities can be expected to be proportional to the excess returns on the factors, the risk on securities is also linked to the risk on the factors.

Indeed, with the introduction of new types of securities, many exotic and really invented in the last decade, traditional risk factors are far from sufficient. This demonstrates the limitation of the factor approach. For such securities, current technological expertise does not allow much more than a rudimentary valuation of the security in various hypothetical but reasonable scenarios.

The power of the risk-based approach becomes apparent when we apply it to portfolio construction from the ground up. Suppose that we were to forecast that equity volatility over the next five years (our investment horizon) would average 20 percent a year (the long-term average or close to it). An equity exposure of 60 percent in our portfolio would translate this to a 12 percent volatility (0.60 times 20 percent) from the equity risk factor. This means an approximately 5 percent chance, of a drawdown of 1.6 times the volatility, that is, a 1 in 20 chance of a drawdown of more than 19.2 percent. Clearly, having this estimate as a rough starting point allows us to scale the big bets properly. Too frequently investors get focused on what to buy and not on how much risk to take. Similarly, for interest-rate risk, if we forecast a volatility of 100 basis points per year, then a 5-year-duration portfolio leads to approximately 5 percent volatility per year and a 1 in 20 chance of a drawdown of more than 8 percent over a year. However, if yields are high enough, the coupon income might subsidize the risks from negative mark-to-market, that is, the embedded carry can smoothen price-based return volatility. This observation highlights something that we will discuss in detail later—that carry, or structural return, is an integral part of robust portfolios.

Fixed Income Risk Factors

For fixed income securities, risk measurement is fundamentally a more complex task than it is for securities such as equities. There are a lot more moving parts. To name a few:

• Shifts of the yield curve lead to duration and convexity risk.

• Yield curve reshaping leads to what is called curve risk.

• Various kinds of spreads can change without the yield curve changing. These result in spread durations.

* Mortgages

* Corporates

* Municipals

* Emerging

* Treasury Inflation Protected Securities (TIPS)

* Converts

•...

Details zur Ausgabe

• Verlag: McGraw-Hill Education Ltd
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0071623701
• ISBN 13: 9780071623704
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 320
• Kontakt zum Hersteller: preigu GmbH & Co. KG; mail@preigu.de; ; Lengericher Landstr. 19; Osnabrück; Niedersachsen; 49078; Deutschland