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I'm trying to backtest some strategies which include 3-5 years single name EM corporate bonds. Some of them don't even have a meaningful historical data. Some others are pretty illiquid. Other than these, my portfolio contains ETFs, equities, FX, and Commodities - pretty much multi asset class portfolio.

For risk management purposes I separated these bonds and looking at them from a different angle. But leaving them out in portfolio optimization will be a bad idea as these bonds account for 20-30% of the overall portfolio.

I guess my question is is it possible to somehow model EM single name corporate bonds? Has anybody come across a similar problem/project? Any resources that you can recommend?

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One way might be to calculate a proxy yield based on peer group metrics such as credit rating and currency. This won't however make any allowance for the liquidity premium, but nonetheless, it might still be a useful approximation. If the credit rating history is not available, then you might have to use something like the KMV model (part of Moody's Analytics) which can be used to estimate a yield based on balance sheet structure.

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  • $\begingroup$ Assuming that I did find a proxy, how do I proceed further? Do you suggest using yield changes $\frac{YTM_t - YTM_t-1}{YTM_t-1}$ or price changes $\frac{P_t - P_t-1}{P_t-1}$ while building covariance matrices with other asset classes? $\endgroup$ – AK88 Apr 19 '17 at 5:13
  • $\begingroup$ @AK88 Your original question is actually a huge issue. If you don't know whether to use yield changes or price changes, then you seem like you're going to be fighting an uphill battle. $\endgroup$ – John Apr 19 '17 at 14:57
  • $\begingroup$ That's exactly what I am doing - fighting an uphill battle. Would appreciate any tips. $\endgroup$ – AK88 Apr 19 '17 at 17:28
  • $\begingroup$ @AK88 You might find this informative: arpm.co/book $\endgroup$ – John Apr 19 '17 at 23:52

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