Diversifying Risks in Bond Portfolios: A Cross-Border Approach

David S. Sun
2013 Social Science Research Network  
This study recalibrates corporate bond idiosyncratic risks in an international context. Applying a statistically powerful risk decomposition scheme, we show in this study that diversification is improved by the addition of a global risk benchmark. We build a long-run stationary yield spread decomposition scheme which provides better diversification effect. Both the global and domestic risk benchmarks are observable yield spreads and are free of measurement or availability issues. The
more » ... ic risk component is estimated as a fixed effect along with all the parameter estimates, rather than separately from an exogenous generating process. Our linear model is simple, yet it can be easily and promptly applied by practitioners.
doi:10.2139/ssrn.2228718 fatcat:drnkyyv3r5hcbimqglidpw37fy