A multi-dimensional decision framework to support corporate bond investment

Abstract

This paper constructs a multi-dimensional decision framework to support investment in corporate bonds. The Analytic Hierarchy Process (AHP) is first customized to accommodate six fundamental criteria governing investor behaviour. It is then shown that, after pairwise comparison of criteria and asset alternatives at appropriate framework levels, a set of weights can be calculated to prioritize the different bonds and allocate wealth over a portfolio which is best in terms of judgmental conformity with the individual's investment goal and investment criteria. Apart from the practical advantages following from ready operationalization and computation, our framework is analytically grounded on the Nobel Prize-winning paradigms of bounded rationality and rational expectations. In particular, an index can be obtained to test for sufficient decision consistency on the part of the bounded-rational individual, and a method is offered to rationally and operationally model changes in investor preferences, perceptions, and expectations under market dynamics and the impact of such changes on the demand for corporate bonds.

A Study on Global Investors’ Criteria for Investment in the Local Currency Bond Markets Using AHP Methods: The Case of the Republic of Korea

“…They classified the criteria for stock selection into six categories: image, indicators, earnings, performance, risk, and account, and concluded that the investment's performance had the most weight amongst them. In a multi-dimensional decision-making study on corporate bond investments, Liao and Cheung (2012) analyzed investments using data on five categories: performance indicators, interest risk, credit risk, inflation risk, and liquidity.…”