This paper defines a “crisis-robust portfolio” that satisfies the minimal crisis-to-quiet time volatility ratio. This type of portfolio is less demanding for the investor than a regime-wise asset allocation. Although general, the concept of a crisis-robust portfolio is especially pertinent when applied to the bond market, which offers a flight-to-quality trade-off during crises (all volatilities increase but most correlations decrease). Using three categories of bonds (sovereign, investment grade corporate, and high yield corporate) in the U.S. and Eurozone for the period 1998-2007, we demonstrate the composition of crisis-robust portfolios and discuss the stabilizing role played by low-quality bonds during crises.
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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number
07-030.RS.
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Maximilian Vermorken & Ariane Szafarz & Hugues Pirotte, 2008.
"Sector Classification through non-Gaussian Similarity,"
Working Papers CEB
08-032.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB).
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