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Quantification of Spread Risk by Means of Historical Simulation
Company: Applied Quantitative Finance
Company Url: Click here to open
Year Of Publication: 2010
Month Of Publication: November
Resource Link: Click here to open
Pages: 37-67
Download Count: 0
View Count: 1168
Comment Num: 0
Language: English
Source: book chapter
Who Can Read: Free
Date: 10-14-2012
Publisher: Administrator
Summary
Modeling spread risk for interest rate products, i.e., changes of the yield difference
between a yield curve characterizing a class of equally risky assets and
a riskless benchmark curve, is a challenge for any financial institution seeking
to estimate the amount of economic capital utilized by trading and treasury
activities. With the help of standard tools this contribution investigates some
of the characteristic features of yield spread time series available from commercial
data providers. From the properties of these time series it becomes
obvious that the application of the parametric variance-covariance-approach
for estimating idiosyncratic interest rate risk should be called into question.
Instead we apply the non-parametric technique of historical simulation to
synthetic zero-bonds of different riskiness, in order to quantify general market
risk and spread risk of the bond. The quality of value-at-risk predictions
is checked by a backtesting procedure based on a mark-to-model profit/loss
calculation for the zero-bond market values. From the backtesting results
we derive conclusions for the implementation of int
Author(s)
Frisch, C_hristoph Sign in to follow this author
Knöchlein, Germar Sign in to follow this author
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