Based on the models of Hull & White (1990) for the pricing of non-defaultable bonds and Schmid & Zagst (2000) for the pricing of defaultable bonds we develop a framework for the optimal allocation of assets out of a universe of sovereign bonds with different time to maturity and quality of the...

For determining an optimal portfolio allocation, parameters representing the underlying market—characterized by expected asset returns and the covariance matrix—are needed. Traditionally, these point estimates for the parameters are obtained from historical data samples, but as experts often...