Abstract
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.
Highlights
A well-known set of developing countries is grouped as the emerging markets economies (EMEs)
This paper focuses on classical portfolio strategies applied to five countries, which are Brazil, Russia, India, China and South Africa
We deeply evaluate and compare portfolio selection in fixed income BRICS market completing and finalizing the analysis made in Ortobelli and Petronio (2015)
Summary
A well-known set of developing countries is grouped as the emerging markets economies (EMEs). We deeply evaluate and compare portfolio selection in fixed income BRICS market completing and finalizing the analysis made in Ortobelli and Petronio (2015). While dealing with developed country bonds is relatively easy and has been analyzed extensively in literature (Bertocchi et al, 2013), the focus on the bond market is challenging when considering BRICS countries because the value of a bond is strictly linked to the creditworthiness of the issuer For this reason, portfolio models are usually applied to credit risk clusters. Assuming that the reward and risk are both positive, the market portfolio is obtained as the solution to the following optimizaportfolio modified duration by using the formula: tion problem:. Benchmark return rb is always set to zero for a more consistent final comparison between all the countries
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