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An Empirical Analysis of the Benefits of Corporate Bond Portfolio Optimization in the Presence of Duration Constraints

Romain Deguest, Lionel Martellini and Vincent Milhau
The Journal of Fixed Income Spring 2022, jfi.2022.1.128; DOI: https://doi.org/10.3905/jfi.2022.1.128
Romain Deguest
is an associate professor of finance at IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France
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Lionel Martellini
is a professor of finance at EDHEC Business School and the president of EDHEC Scientific Retirement
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Vincent Milhau
is the head of research at EDHEC Scientific Retirement
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Abstract

This article analyzes the out-of-sample performance of portfolio optimization models in the US corporate bond universe. In our empirical study, we measure the benefits of naive diversification and find that it eventually reaches a limit as the number of bonds increases. Also, we observe substantial improvements in the risk-adjusted performance of scientific portfolio constructions when compared to simple barbell strategies for the same given duration. When duration constraints are relaxed, we find that both naively and scientifically diversified portfolios outperform cap-weighted benchmarks in terms of Sharpe ratio.

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The Journal of Fixed Income: 32 (1)
The Journal of Fixed Income
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An Empirical Analysis of the Benefits of Corporate Bond Portfolio Optimization in the Presence of Duration Constraints
Romain Deguest, Lionel Martellini, Vincent Milhau
The Journal of Fixed Income Jan 2022, jfi.2022.1.128; DOI: 10.3905/jfi.2022.1.128

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An Empirical Analysis of the Benefits of Corporate Bond Portfolio Optimization in the Presence of Duration Constraints
Romain Deguest, Lionel Martellini, Vincent Milhau
The Journal of Fixed Income Jan 2022, jfi.2022.1.128; DOI: 10.3905/jfi.2022.1.128
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  • Article
    • Abstract
    • GENERATING CONSISTENT RISK AND RETURN ESTIMATES FOR CORPORATE BONDS
    • BOND PORTFOLIO STRATEGIES AND CONSTRAINTS
    • EMPIRICAL STUDY
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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