Parsimonious Value at Risk for Fixed Income Portfolios

Abstract

The standard approach to the risk analysis of fixed income portfolios involves a mapping of exposures into representative duration buckets. This approach does not provide a transparent description of the portfolio risk in the case of leveraged portfolios, particularly in the case of portfolios whose primary intent is to trade convexity. In this paper, an alternative approach, based upon Level, Slope and Curvature yield curve factors, is described. The alternative approach offers a linear model of non-linear trading strategies.