A Stochastic Programming Model for the Optimal Issuance of Government Bonds

Consiglio, Andrea; Staino, Alessandro

doi:10.2139/ssrn.1277870

Cited by 12 publications

(16 citation statements)

References 6 publications

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“…The CVaR constraint is also bounded to control the maximum amount of conditional risk tolerated. A similar bound is explained in Consiglio and Staino (2010):…”

Section: Risk Measuressupporting

confidence: 57%

“…Other notable work in this area includes Bernaschi et al (2007), which provides results on the multivariate simulation of interest rates using observable (ECB) rates as well as analysis of principal components. The research reported in Consiglio and Staino (2010) and Balibek and Köksalan (2010) is the closest in spirit to the work reported here, in the sense that, both these papers also develop multi-stage stochastic programming models for sovereign debt issuance.…”

Section: The Debt Management Problemmentioning

confidence: 73%

“…The authors are not aware of the use of filtering based framework to generate scenarios in a supply-side optimization. (2) We use a recombining lattice-based stochastic programming model as opposed to a non-recombining scenario tree used in Consiglio and Staino (2010) and Balibek and Köksalan (2010) while discussing the sovereign debt issuance. This makes the problem computationally significantly simpler, as the number of scenarios is reduced significantly, while retaining consistency with the underlying theoretical interest rate model.…”

Section: The Debt Management Problemmentioning

confidence: 99%

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A mixed integer linear programming model for optimal sovereign debt issuance

Date

Canepa

Abdel-Jawad

2011

European Journal of Operational Research

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Governments borrow funds to finance the excess of cash payments or interest payments over receipts, usually by issuing fixed income debt and index-linked debt. The goal of this work is to propose a stochastic optimization-based approach to determine the composition of the portfolio issued over a series of government auctions for the fixed income debt, to minimize the cost of servicing debt while controlling risk and maintaining market liquidity. We show that this debt issuance problem can be modeled as a mixed integer linear programming problem with a receding horizon. The stochastic model for the interest rates is calibrated using a Kalman filter and the future interest rates are represented using a recombining trinomial lattice for the purpose of scenario-based optimization. The use of a latent factor interest rate model and a recombining lattice provides us with a realistic, yet very tractable scenario generator and allows us to do a multi-stage stochastic optimization involving integer variables on an ordinary desktop in a matter of seconds. This, in turn, facilitates frequent re-calibration of the interest rate model and re-optimization of the issuance throughout the budgetary year allows us to respond to the changes in the interest rate environment. We successfully demonstrate the utility of our approach by out-of-sample back-testing on the UK debt issuance data.

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“…The CVaR constraint is also bounded to control the maximum amount of conditional risk tolerated. A similar bound is explained in Consiglio and Staino (2010):…”

Section: Risk Measuressupporting

confidence: 57%

Section: The Debt Management Problemmentioning

confidence: 73%

Section: The Debt Management Problemmentioning

confidence: 99%

See 1 more Smart Citation

A mixed integer linear programming model for optimal sovereign debt issuance

Date

Canepa

Abdel-Jawad

2011

European Journal of Operational Research

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“…To some degree, structure of the general government debt obligations in small open economies also should be considered more carefully than in large economies, because it is argued that structure of the debt has influence on the sustainability of the debt (Melecky, 2012;Consiglio & Staino, 2012;Date et al, 2011). For instance, it is argued that the higher the share of short-term credit is in overall debt, the larger and more vulnerable is the annual flow of debt-service obligations.…”

Section: Figure 1 Principle Scheme Of Foreign Lending-borrowingmentioning

confidence: 99%

“…As already discussed, sometimes solvency of the general government is evaluated in respect of the debt structure peculiarities (Melecky, 2012;Consiglio & Staino, 2012;Date et al, 2011;Milne, 2011;Choi et al, 2010). Lately, however, it is increasingly recognized that in applied economic and financial models, the accuracy of the results is strongly influenced by the use of stochastic variables (Consiglio & Staino, 2012;Date et al, 2011;Hajdenberg & Romeu, 2010;Frank & Ley, 2009;Ciegis et al, 2009;Ferrarini, 2009;Budina & van Wijnbergen, 2009;Ferrarini, 2008;Tanner & Samake, 2008;Genberg & Sulstarova, 2008) and complex analysis of debt indicators (Knedlik & Von Schweinitz, 2012;Sopek, 2009).…”

Section: Evaluation Of the Sustainability Of General Government's Debmentioning

confidence: 99%

Evaluation of Sustainability of the General Government Debt in a Small Open Economy

Snieška

Drakšaitė

2013

MJSS

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Optimal bond issuance with cost and liquidity constraints for Chinese local governments: a multi-period stochastic programming approach

Rui-cheng

Jiang

et al. 2022

Empir Econ

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In recent years, China's local governments have issued numerous bonds to support the country's economic development. However, as total debt accumulates, the pressure on debt repayments is gradually increasing. To increase the sustainability of local government debt, we propose a multi-period stochastic optimization-based approach to determining the portfolio composition of issued bonds, with the goal of minimizing the expected cost under the constraints of liquidity risk and cost deviation risk. Liquidity risk is measured by conditional payment-at-risk (C Pa R), and cost deviation risk is measured by conditional value-at-risk (C V a R). By bounding C V a R and C Pa R, local governments can control the levels of cost deviation risk and liquidity risk. To alleviate future liquidity risk, which is caused by the issuance of a large number of long-term bonds to deliberately reduce repayment pressure within a debt planning horizon, we consider an extended liquidity planning horizon to manage both current and future liquidity risk. Based on this, we analyze the efficient frontier and portfolio compositions of issued bond under the constraints of different C V a R and C Pa R levels. Compared with actual Chinese local government bond portfolios, the efficient frontier performs better for different issuance strategies.

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A Stochastic Programming Model for the Optimal Issuance of Government Bonds

Cited by 12 publications

References 6 publications

A mixed integer linear programming model for optimal sovereign debt issuance

A mixed integer linear programming model for optimal sovereign debt issuance

Evaluation of Sustainability of the General Government Debt in a Small Open Economy

Optimal bond issuance with cost and liquidity constraints for Chinese local governments: a multi-period stochastic programming approach

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