Improving Grid-Based Methods For Estimating Value At Risk Of Fixed-Income Portfolios
- Topics:
- Commercial Lending,
- Portfolio Management
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Overview: Article discusses a discrete grid method for simplifying the computation of Value at Risk (VaR) for fixed-income portfolios provided by Jamshidian and Zhu. The method relies on two simplifications. First, the value of fixed income instruments is modeled as depending on a small number of risk factors chosen using principal components analysis. Second, use of discrete approximation to the distribution of the portfolio's value. It states two refinements to the method to correct the shortcomings. First, choosing risk factors according to their ability to explain the portfolio's value. To do this, instead of generating risk factors with principal components analysis, the generate a statistical technique called partial least squares. Second, it compute VaR with a "Grid Monte Carlo" method that uses continuous risk factor distributions while maintaining the computational simplicity of a grid method for pricing.
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Format: PDF | Size: 226KB | Date: Mar 2000 | Pages: 31
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