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The art of tracking corporate bond portfolios

The corporate bond indices, built by market index providers to serve as investment benchmarks, contain a great many securities, and are for that reason difficult to replicate. The art is to construct an investible portfolio that captures the general price trend among the several thousands of securities in the index, being limited to selecting few of them. This paper describes a practical approach to this, which combines a well-established portfolio construction technique known as stratified sampling with a modern bond risk measure named the Duration Times Spread.

The key idea is to divide the index members into samples related to distinct sources of risk that play in the corporate bond markets, and build small subsamples that capture those risks. As the Duration Times Spread conveys linear- as well as non-linear bond price behaviour, it proves an effective measure in the portfolio building process.

GOUZILH Laurent , Fixed-Income Quantitative Research at Amundi
de JONG Marielle , Head of Fixed Income Quantitative Research at Amundi
LEBAUPAIN Thierry , High Yield Portfolio Management at Amundi
WU Hongwen , Quantitative Research at Amundi

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The art of tracking corporate bond portfolios
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