VaR analysis for fixed income securities requires a preliminary mapping phase which allows to decompose actual trading positions into virtual exposures to several chosen key rates. The question arises whether a more parsimonious method can be found. The goal of this paper is to make an attempt in this direction. We initially test a method that exploits the possibility to depict the historical dynamics of interest rates with just few latent factors and which is also able, by means of a simulation approach, to provide plausible scenario analysis for the term structure. We also propose a new solution to express bonds' sensitivity to the extracted principal components which makes simulating bond portfolio value changes in response to many generated interest rate scenarios extremely simple and quick.
Value at risk computation by means of principal component analysis: the european case
BRAGA, MARIA DEBORA
2006-01-01
Abstract
VaR analysis for fixed income securities requires a preliminary mapping phase which allows to decompose actual trading positions into virtual exposures to several chosen key rates. The question arises whether a more parsimonious method can be found. The goal of this paper is to make an attempt in this direction. We initially test a method that exploits the possibility to depict the historical dynamics of interest rates with just few latent factors and which is also able, by means of a simulation approach, to provide plausible scenario analysis for the term structure. We also propose a new solution to express bonds' sensitivity to the extracted principal components which makes simulating bond portfolio value changes in response to many generated interest rate scenarios extremely simple and quick.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
