A portfolio-based evaluation of affine term structure models |
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Authors: | Andrea Beltratti Paolo Colla |
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Institution: | (1) Università Bocconi, Via Gobbi, 5, 20136 Milan, Italy |
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Abstract: | We focus on affine term structure models as tools for active bond portfolio management. Our financial exercise comprises the
following steps: 1) forecast the future values of the state variables implied by several multi-factor models; 2) approximate
the conditional moments of the state vector to come up with discrete scenarios for the future state variables 3) compute bond
returns for various maturities at future dates from the theoretical asset pricing relations 4) solve the portfolio problem
faced by an investor with a six month horizon who takes into account the possibility to rebalance after one quarter. The sequence
of optimal portfolios is evaluated in terms of financial properties. We show that a financial based evaluation of term structure
models may yield results conflicting with those obtained from a statistical evaluation. |
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Keywords: | Affine models Dynamic optimization Active asset allocation |
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