+1 Added to my documents.
Please be aware your selection is temporary depending on your cookies policy.
Remove this selection here

Asset Allocation under (one’s own) Sovereign Default Risk


The Greek drama of the late 2000s has returned sovereign risk awareness to centre stage. The default affected a country with a relatively developed economy. It resulted in huge losses in the value of domestic assets: public debt, but also private debt, equity, real estate and furthermore pension rights and human capital. The burden has, not entirely but importantly, fallen on residents.

Should a sovereign default happen, the consequences are therefore severe for investors, not only on the sovereign’s debt, but also on all assets under the sovereign’s jurisdiction, which are contaminated by the default.

Investors should take account of sovereign default in their investment plans. The perspective of sovereign default reinforces the case for international diversification and for leaning against home bias.

There are also implications for the asset management industry: it should lean against its own home bias and provide efficient solutions for cross-border investment.

Amundi Working Paper - June  2016

Didier MAILLARD, Professor - Conservatoire National des Arts et Métiers, Senior Advisor, Amundi

Download this article in PDF format

Send by e-mail
Asset Allocation under (one’s own) Sovereign Default Risk
Was this article helpful?YES
Thank you for your participation.
0 user(s) have answered Yes.
Related articles
Strategy Plan
Strategy Plan
24.05.2013 - Special Focus

Rethinking strategic asset allocation in terms of diversification across macroeconomic scenarios

A novel approach in Strategic Asset Allocation consists in looking at asset classes as vehicles of more fundamental factors. According to this method, fundamental factors govern the majority of asset class dynamics, and hence asset allocation should be rephrased in terms of risk allocation of fundamental factors.The aim of this letter is firstly to illustrate market segmentation in terms of factors dynamics,and then to focus on some consequences of our approach.   A new challenge in asset allocation, looking at assets as vehicles of more fundamental factors, offers a new language to decipher financial markets. It builds a bridge between rigorous portfolio construction, echoing today popular risk- parity approaches, and a more fundamental method which interprets financial markets in terms of macroeconomic dynamics. Asset segmentation in terms of macroeconomic changes allows us to exploit portfolio diversification to the level of fundamental factors, and to directly relate asset allocation to factors’ risk premia. Traditional approaches look at nominal bonds, commodities and equities as representative of (respectively) deflation, inflation, and growth. We show that this interpretation is not adequate: asset classes do not constitute good axes, as, e.g. equity and commodity share similar polarization to economic growth, but are opposite in terms of inflation. Our study suggests (1) a methodology to build factors-equivalent synthetic asset classes (e.g. commodity factors’ behaviour is shown to be well approximated by a long position on equities and inflation linked bonds, and a short position on nominal bonds), and (2) balanced allocation better equipped to navigate financial markets in uncertainty.

Gianni POLA

Quantitative research at Amundi