A MULTISTAGE DECISION MODEL FOR THE OPTIMAL ISSUANCE OF SOVEREIGN DEBT UNDER ESA95

The aim of this paper is to develop a stochastic programming model for the optimal composition of debt portfolios. Such a prob- lem has recently acquired a more and more major interest, being the indebtedness of many countries quite worrying. We propose a stochastic programming model where the decision maker desires to minimize a certain cost function while bounding the interest rate risk. Our analysis focus mainly on the cost function ESA95, which is a methodology developed by the European System of Accounts to gauge the cost of servicing the debt. The model is implemented under two financing strategies, one as- sumes the government cannot resort to budget surplus to pay interest expenses, and the other one the interest expenses are repaid entirely by budget surplus. We show results about these two financing strategies and compare the results. We conclude the paper by substituting the cost function ESA95 with the market value of all the not expired debt and showing the results of this modified model.