Doctoral thesis

Dynamic term structure models and inflation: implications for asset allocation and corporate debt structure

Capital Structure Decisions and the Optimal Design of Corporate Market Debt Programs: This paper provides a joint quantitative analysis of capital structure decisions (debt versus ...

Author(s) :

Andrea Tarelli, PhD

Assistant Professor at the Catholic University of Milan (Italy)

Abstract :

Capital Structure Decisions and the Optimal Design of Corporate Market Debt Programs: This paper provides a joint quantitative analysis of capital structure decisions (debt versus equity) and debt structure decisions (fixed-rate debt versus floating-rate debt or inflation-linked debt) in a dynamic continuous-time setting. We show that optimal debt structure decisions have an impact on capital structure decisions, and lead to increases in leverage ratios compared to a pure fixed-rate debt program. We also find that substantial increases in firm value can be generated by optimal debt structure decisions. In fact, debt structure decisions matter even more than capital structure decisions for some reasonable parameter values.

Does Monetary Policy Matter for a Long-Term Investor?: This paper develops a dynamic asset allocation model under inflation for an investor with a long-term finite horizon, benefiting from utility over consumption and real balances. The nominal short-term rate is expressed in terms of a Taylor rule, allowing to study the impact of monetary policy parameters on portfolio strategy and welfare. Two different specifications of the financial market are considered, the first being a three-factor term structure model, with time-varying bond and equity premium, the second instead describing the term structure with two factors and using a third factor, extracted through Kalman filtering, to contribute to the explanation of the equity premium. This second setting provides more realistic results overall, capturing a richer set of market information and allowing the equity to have an intertemporal hedging role in the optimal strategy. As the portfolio with money in the utility function can not be computed in closed-form, the Malliavin Monte Carlo Derivatives method is used. Empirical evidence shows that an actively onservative monetary policy provides a better hedge of inflation and leads to a reduction of the positions into risky assets, as well as an overall increase of welfare. Furthermore, when the investor cares about real balances, a hedging demand covering instantaneous variations in relative risk aversion appears in the optimal strategy, causing bond positions to be reduced.

Date : 14/10/2013
Thesis Committee :

Supervisor: Abraham Lioui , EDHEC Business School                         

External reviewer: Mikhail Chernov, London School of Economics                                                 

Other committee members: René Garcia, EDHEC Business School

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