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Bond portfolio management under solvency II regulation

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journal contribution
posted on 2023-06-09, 22:05 authored by Mikica Drenovak, Vladimir Rankovic, Branko Uroševic, Ranko JelicRanko Jelic
We develop a novel approach to the bond portfolio optimization for insurance companies that are subject to the new Solvency II regulation. The regulatory efficient portfolios are determined using the Non-dominated Sorting Genetic Algorithm II (NSGA-II). The characteristics of the estimated efficient portfolios are examined in different market regimes. Our findings suggest low cardinality of all estimated efficient portfolios despite explicit regulatory penalties for highly concentrated portfolios. The efficient portfolios are dominated by short term and BBB rated bonds. The lack of diversification and over-exposure to bonds with higher credit risk in different market regimes represents a weakness of the Solvency II regulation with unintended consequences for management of insurance companies.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

European Journal of Finance

ISSN

1351-847X

Publisher

Taylor & Francis

Page range

1-23

Department affiliated with

  • Accounting and Finance Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2020-11-09

First Open Access (FOA) Date

2022-06-04

First Compliant Deposit (FCD) Date

2020-11-07

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