Fixed income management: an active strategy to optimize investments timing.

Abstract

The goal of this work is to apply an active management strategy to a financial portfolio composed by fixed income securities. We use Vasicek and Cox Ingersoll Ross (CIR) interest rate models to exploit projections of future interest rate levels. The first part is dedicated to a brief overview of the fixed income market especially to understand the different measures available to compute the array of risks that an investor has to consider when investing in fixed income securities. The second part provides a comparison between the characteristics of Vasicek and CIR models. They “short interest rate models” which are used to describe the future evolution of interest rates. The analysis focuses on the most important characteristics of these models: mean reversion effect and volatility. Finally, we consider an optimization model with the aim of improving the total return on the initial wealth exploiting the interest rate levels and the investment timing. The strategy consists in shifting the maturity composition of the portfolio according to the expectation given by the models. Comparisons with other investment strategies are provided.