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.
2006
PORTFOLIO VALUE
INTEREST RATES
EUROPE
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.14087/4642
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