Practical Financial Optimization: A Library of GAMS Models

Chapter 4

Portfolio Models for Fixed Income

4.1 Preview

In this chapter we develop the GAMS models for fixed-income portfolio optimization. The development is based on the discussion of Chapter PFO-4. The following models are discussed in this chapter and the GAMS source code for each is given in the associated FINLIB files:

Basics of fixed-income modeling implements simple GAMS models to perform standard financial calculations, and for bootstrapping a yield curve from bond prices.

• JDate.gms

• DiscreteFinCalc.gms

• ContinuousFinCalc.gms

• Bootstrap.gms

Dedication models are based on Section PFO-4.2. We give models for the standard portfolio dedication with borrowing and reinvestment decisions, and its extensions to maximize horizon return and to incorporate various practical considerations on the portfolio tradeability.

• Dedication.gms

• Horizon.gms

• DedicationMIP.gms

Immunization models are based on Sections PFO-4.3, PFO-4.4, and PFO-4.5. We give models for the factor immunization of portfolios of treasury bonds as well as corporate bonds. Data are given for the US, Italian, and Danish markets.

• Immunization.gms

• FactorImmunization.gms

• FactorYieldImmunization.gms

• CreditImmunization.gms

4.2 Basics of Fixed-Income Modeling

We start with some basic modeling constructs that are encountered repeatedly in the FINLIB models. In the process we develop some simple GAMS models that can be used as financial calculators.

4.2.1 Modeling time

Fixed-income models in general have long ...