Portfolio Allocation under Sovereign Risk: Evidence from Brazil

Portfolio Allocation under Sovereign Risk: Evidence from Brazil

• Autor
• Maria Ferreira
• Co-autores
• Marcelo Fernandes
• Resumo

• This paper examines a portfolio allocation strategy in which investment decisions depend on whether sovereign risk is high or low. We gauge sovereign risk by means of the spread on the 5-year credit default swap (CDS). The central premise is that the CDS spread provides a timely, market-based proxy for institutional risk, enabling portfolio weights to adjust dynamically across low- and high-risk environments. We show that the mean-variance portfolio conditional on the CDS spread regime entails a better risk-adjusted performance in the Brazilian market than the unconditional mean-variance portfolio and equal-weighted portfolio. This is particularly true for periods of high sovereign risk.

• Palavras-chave
• asset allocation; CDS spread; mean-variance optimization; risk premium.
• Modalidade
• Comunicação oral
• Área Temática
• Apreçamento de Ativos

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