Frank J. Fabozzi & Lionel Martellini 
Advanced Bond Portfolio Management 
Best Practices in Modeling and Strategies

In order to effectively employ portfolio strategies that can
control interest rate risk and/or enhance returns, you must
understand the forces that drive bond markets, as well as the
valuation and risk management practices of these complex
securities. In Advanced Bond Portfolio Management,
Frank Fabozzi, Lionel Martellini, and Philippe Priaulet have
brought together more than thirty experienced bond market
professionals to help you do just that.

Divided into six comprehensive parts, Advanced Bond
Portfolio Management will guide you through the
state-of-the-art techniques used in the analysis of bonds and bond
portfolio management. Topics covered include:

* General background information on fixed-income markets and bond
portfolio strategies

* The design of a strategy benchmark

* Various aspects of fixed-income modeling that will provide key
ingredients in the implementation of an efficient portfolio and
risk management process

* Interest rate risk and credit risk management

* Risk factors involved in the management of an international
bond portfolio

Filled with in-depth insight and expert advice, Advanced
Bond Portfolio Management is a valuable resource for anyone
involved or interested in this important industry.

Table of Content

Preface ix

About the Editors xv

Contributing Authors xvii

PART ONE Background 1

CHAPTER 1 Overview of Fixed Income Portfolio Management 3
Frank J. Jones

CHAPTER 2 Liquidity, Trading, and Trading Costs 21
Leland E. Crabbe and Frank J. Fabozzi

CHAPTER 3 Portfolio Strategies for Outperforming a Benchmark 43
Bülent Baygün and Robert Tzucker

PART TWO Benchmark Selection and Risk Budgeting 63

CHAPTER 4 The Active Decisions in the Selection of Passive Management and Performance Bogeys 65
Chris P. Dialynas and Alfred Murata

CHAPTER 5 Liability-Based Benchmarks 97
Lev Dynkin, Jay Hyman, and Bruce D. Phelps

CHAPTER 6 Risk Budgeting for Fixed Income Portfolios 111
Frederick E. Dopfel

PART THREE Fixed Income Modeling

CHAPTER 7 Understanding the Building Blocks for OAS Models 131
Philip O. Obazee

CHAPTER 8 Fixed Income Risk Modeling 163
Ludovic Breger and Oren Cheyette

CHAPTER 9 Multifactor Risk Models and Their Applications 195
Lev Dynkin and Jay Hyman

PART FOUR Interest Rate Risk Management 247

CHAPTER 10 Measuring Plausibility of Hypothetical Interest Rate Shocks 249
Bennett W. Golub and Leo M. Tilman

CHAPTER 11 Hedging Interest Rate Risk with Term Structure Factor Models 267
Lionel Martellini, Philippe Priaulet, Frank J. Fabozzi, and Michael Luo

CHAPTER 12 Scenario Simulation Model for Fixed Income Portfolio Risk Management 291
Farshid Jamshidian and Yu Zhu

PART FIVE Credit Analysis and Credit Risk Management 311

CHAPTER 13 Valuing Corporate Credit: Quantitative Approaches versus Fundamental Analysis 313
Sivan Mahadevan, Young-Sup Lee, Viktor Hjort, David Schwartz, and Stephen Dulake

CHAPTER 14 An Introduction to Credit Risk Models 355
Donald R. van Deventer

CHAPTER 15 Credit Derivatives and Hedging Credit Risk 373
Donald R. van Deventer

CHAPTER 16 Implications of Merton Models for Corporate Bond Investors 389
Wesley Phoa

CHAPTER 17 Capturing the Credit Alpha 407
David Soronow

PART SIX International Bond Investing 419

CHAPTER 18 Global Bond Investing for the 21st Century 421
Lee R. Thomas

CHAPTER 19 Managing a Multicurrency Bond Portfolio 445
Srichander Ramaswamy and Robert Scott

CHAPTER 20 A Disciplined Approach to Emerging Markets Debt Investing 479
Maria Mednikov Loucks, John A. Penicook, Jr., and Uwe Schillhorn

INDEX 533

About the author

Frank J. Fabozzi, Ph D, CFA, CPA, is the Frederick Frank Adjunct
Professor of Finance at Yale University’s School of Management and
a Fellow of the International Center for Finance. Prior to joining
the Yale faculty, Fabozzi was a visiting professor of finance in
the Sloan School at MIT. He is the Editor of the Journal of
Portfolio Management.

Lionel Martellini, Ph D, is Professor of Finance at EDHEC
Graduate School of Business in France and the Scientific Director
of EDHEC Risk and Asset Management Research Centre. A former member
of the faculty at the Marshall School of Business, University of
Southern California, he holds Master’s Degrees in Business
Administration, Economics, Statistics, and Mathematics, as well as
a Ph D in Finance from the Haas School of Business, University of
California, Berkeley.

Philippe Priaulet, PHD, is the Head of Global Strategy at
Natexis Banques Populaires. He is also an Associate Professor in
the Department of Mathematics at the Université of Evry Val
d’Essonne. He holds Master’s Degrees in Business Administration and
Mathematics as well as a Ph D in Financial Economics from the
Université Paris IX Dauphine.