Ramaswamy’s Model

Ramaswamy (1998) presented a bond portfolio selection method using the fuzzy decision theory in a BIS (Bank for international settlements) working paper. The proposed approach can ensure that investors get a given minimum rate if return.

In order to meet the return target for assets under management, fund managers have to constantly judge the direction of financial market moves. Due to the inherent uncertainty of financial market, fund managers are very cautious in expressing their views about the market. Ramaswamy described the information content in such cautious views as fuzzy or vague, in terms of both the direction and the size of market moves. Ramaswamy assumed that the investment horizon is typically one to three months and the investment universe consists of government debt securities and plain vanilla options on these securities in his paper. The target rate of return were assumed to be a certain number of basis points above Libor over the given investment horizon. Considering the investment horizon and the selected securities, the methodology is suitable for central banks managing their short-term liquidity portfolio especially.