Avoiding unnecessary payday loans
Dynamic portfolio insurance tries to cut off the left-hand side of the return distribution, which is equivalent to avoiding bonds that experience a massive spread widening, in other words the credit blowups. Our study illustrates that the distribution of corporate bond spread changes is skewed to the right. Large spread widenings occur more often than would be implied by a normal distribution, and of course are not compensated by spread tightenings of the same magnitude. Therefore one of the major characteristics of the distribution of corporate bond is the dreaded fat tail on the left-hand side of the return distribution.
