Portfolio allocation under sovereign risk: Evidence from Brazil
Published:
Apr 19, 2026
Volume:
24
Keywords:
Asset Allocation
CDS Spread
Mean Variance Optimization
Risk premium
Abstract
This paper examines a portfolio allocation strategy in which investment decisions depend on whether sovereign risk is high or low. We gauge sovereign risk by means of the spread on the 5-year credit default swap (CDS). The central premise is that the CDS spread provides a timely, market-based proxy for institutional risk, enabling portfolio weights to adjust dynamically across low- and high-risk environments. We show that the mean-variance portfolio conditional on the CDS spread regime entails a better risk-adjusted performance in the Brazilian market than the unconditional mean-variance portfolio and equal-weighted portfolio. This is particularly true for periods of high sovereign risk.
How to cite
Maria Ferreira, Marcelo Fernandes. Portfolio allocation under sovereign risk: Evidence from Brazil. Brazilian Review of Finance, v. 24, n. 1, 2026. p. e202606. DOI: 10.12660/rbfin.v24n1.2026.97610.
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