The Dynamic Optimization Of Bond-oriented Fund And The Analysis Of Its Interest Rate Risk

This article uses the quasi-dynamic programming approach by S?rensen [15]to solve the optimization problem of Chinese bond fund with the indirect utilityfunction as the target, gives the optimized allocation among bonds with di?erentdurations and stock index, and analyzes some general laws. Meanwhile, thisarticle uses duration approach, VaR analysis and stress test to value the interestrisk of the optimized allocation and give some conclusion. Some of the results are:(1)With the constrains on weight of single security, the asset should be allocatedto the near securities. (2)The asset allocation resembles a dumbbell when therisk averse(λ) is low, and resembles bullet when the risk averse is high. (3)Sincethe coe?cients among Chinese bonds with di?erent duration are high, the mainaim of allocation among di?erent bonds is not to lower risk but to adjust theportfolio duration.The ?rst part gives the pricing function of bonds [2] under the assumptionsof mean-reverse process and Vasicek [1] model. This part also reorganizes the pro-cess of deducing the indirect function, discusses the relation of indirect functionwith risk averse coe?cient and interest rate, and deduces the partial di?erentialsof di?erent orders. The second part simulates the bond-oriented fund in market.It gives the target function using the quasi-dynamic approach at ?rst, and thentransforms the function, gets the allocation result of bonds and stock index usingthe MATLAB programming. Finally, this part uses sensitivity analysis to com-pare di?erent results, and ?nds some laws of allocation. The third part discussesthe interest rate market and interest rate risk in China. It analyzes the monetarypolicy and the reactions of capital market since 1993 and the government bondyields from 2006 to 2009, and also uses GARCH on one year bond yield. The lastpart makes risk analysis on the result of optimized results, using the duration measurement, VaR under variance-covariance method, and stress test based onthe Chinese capital market. It also provides some risk hedging advice.