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Two-stage bond portfolio optimization and its application to Saudi Sukuk Market

Author

Listed:
  • Nasser Aedh Alreshidi

    (Northern Border University
    Florida Institute of Technology)

  • Mehdi Mrad

    (King Saud University)

  • Ersoy Subasi

    (Florida Institute of Technology)

  • Munevver Mine Subasi

    (Florida Institute of Technology)

Abstract

We consider a two-stage stochastic bond portfolio optimization problem, where an investor aims to optimize the cost of bond portfolio under different scenarios while ensuring predefined liabilities during a given planning horizon. The investor needs to optimally decide whether to buy, hold, or sell bonds based upon present market conditions under different scenarios and varying assumptions, where the scenarios are determined based on interest rates and buying prices of the bonds. Three stochastic integer programming models are proposed and tested using real data from Saudi Sukuk (Bond) Market. The obtained results demonstrate the varying optimal decisions made to manage bond portfolio over the two stages. In addition, the three stochastic programming models for bond portfolio optimization are tested on a large set of randomly generated instances similar to the Saudi Sukuk (Bond) Market. The results of computational experiments attest the efficiency of the proposed models.

Suggested Citation

  • Nasser Aedh Alreshidi & Mehdi Mrad & Ersoy Subasi & Munevver Mine Subasi, 2020. "Two-stage bond portfolio optimization and its application to Saudi Sukuk Market," Annals of Operations Research, Springer, vol. 288(1), pages 1-43, May.
    • Handle: RePEc:spr:annopr:v:288:y:2020:i:1:d:10.1007_s10479-020-03544-5
    DOI: 10.1007/s10479-020-03544-5
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    References listed on IDEAS

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    1. Ronn, Ehud I., 1987. "A New Linear Programming Approach to Bond Portfolio Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(4), pages 439-466, December.
    2. Korn, Olaf & Koziol, Christian, 2006. "Bond portfolio optimization: A risk-return approach," CFR Working Papers 06-03, University of Cologne, Centre for Financial Research (CFR).
    3. Hodges, S. D. & Schaefer, S. M., 1977. "A Model for Bond Portfolio Improvement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(2), pages 243-260, June.
    4. Stephen P. Bradley & Dwight B. Crane, 1972. "A Dynamic Model for Bond Portfolio Management," Management Science, INFORMS, vol. 19(2), pages 139-151, October.
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