A factor-based approach of bond portfolio value-at-risk: the informational roles of macroeconomic and financial stress factors

Tu, A. H. and Chen, C. Y.-H. (2018) A factor-based approach of bond portfolio value-at-risk: the informational roles of macroeconomic and financial stress factors. Journal of Empirical Finance, 45, pp. 243-268. (doi: 10.1016/j.jempfin.2017.11.010)

Abstract

Based on the Nelson–Siegel term structure framework, we develop a new factor-augmented model for the computation of the value-at-risk (VaR) of bond portfolios, and examine whether the inclusion of information contained within macroeconomic variables and financial stress shocks can enhance the accuracy of VaR forecasts. We examine three Citi US bond indices and the empirical results reveal that: (1) based upon the geometric-VaR backtest, proposed by Pelletier and Wei (2016), the new factor-augmented approach provides reasonably accurate VaR forecasts; (2) there is a clear tendency toward better VaR forecasting performance as a result of the inclusion of the macroeconomic variables and financial stress shocks in the Nelson–Siegel factor model; (3) the impact of the inclusion of financial stress shocks appears to be stronger than the impact of the inclusion of the macroeconomic variables.

• Item Type: Articles
• Additional Information: The authors gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft through SFB 649 ‘‘Economic Risk’’ and IRTG 1792 ‘‘High Dimensional Non Stationary Time Series’’.
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Chen, Professor Cathy Yi-Hsuan
• Authors: Tu, A. H., and Chen, C. Y.-H.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of Empirical Finance
• Publisher: Elsevier
• ISSN: 0927-5398
• ISSN (Online): 1879-1727
• Published Online: 06 December 2017