DYNAMIC-MODELS FOR FIXED-INCOME PORTFOLIO MANAGEMENT UNDER UNCERTAINTY

We develop multi-period dynamic models for fixed-income portfolio mana gement under uncertainty, using multi-stage stochastic programming wit h recourse. The models integrate the prescriptive stochastic programs with descriptive Monte Carlo simulation models of the term structure o f interest rates. Extensive validation experiments are carried out to establish the effectiveness of the models in hedging against uncertain ty, and to assess their performance vis-a-vis single-period models. An application to tracking the Salomon Brothers Mortgage Index is report ed, with very encouraging results. Results that establish the efficacy of the models in hedging against out-of-sample scenarios are also rep orted for an application from money management. The multi-period model s outperform classical models based on portfolio immunization and sing le-period models. (C) 1998 Elsevier Science B.V. All rights reserved.