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Title: Asset classification under the IFRS 9 framework for the construction of a banking investment portfolio
Authors: Brito, Rui Pedro Gonçalves de 
Júdice, Pedro Maria Corte-Real Alarcão 
Keywords: asset classification; backtesting; IFRS 9; derivative-free optimization; sensitivity analysis; stochastic simulation
Issue Date: 11-Apr-2021
Publisher: Wiley
Project: CEECIND/01010/2017 
Serial title, monograph or event: International Transactions in Operational Research
Abstract: Under the IFRS 9 framework, we analyze the tradeoff of classifying a financial asset at amortized cost versus at fair value. Defining an impairment model and based on historical (2003-2019) data for the 10-year Portuguese Government bonds, we analyze the annual performance (income/comprehensive income) of different investment allocations. Setting as objectives the maximization of the income and the minimization of the semivariance of the comprehensive income, we suggest a bi-objective model in order to find efficient allocations. Given the non-smoothness of the semivariance function, we compute the solution of the suggested model by means of a multi-objective derivative-free algorithm. Assuming that the yields and funding rates follow a correlated mean-reverting process and that the bonds' rating dynamics are described by an ordinal response model, we show a possible approach to mitigate the estimation error ingrained in the proposed bi-objective stochastic model. Finally, we assess the out-of-sample performance of some of the suggested efficient allocations.
ISSN: 0969-6016
DOI: 10.1111/itor.12976
Rights: embargoedAccess
Appears in Collections:I&D CeBER - Artigos em Revistas Internacionais

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