Approaches to Risk Measurement for Portfolio of Bonds & Credit Default Swaps
نویسندگان
چکیده
In our project we have used parametric simulation and filtered historical simulation by GARCH processes to model the future position on a portfolio of some actively trading S&P bonds and related credit default swaps. The portfolio is marked to market daily based on the daily prices and CDS spreads over a seven year period. The Credit default swaps are priced daily based on the shifts in the default risks of the various assets. Historical simulation assigns equal probability to past returns, neglecting current market conditions. It also tends to overlook the volatility clustering of data. The GARCH process takes into account the change in volatility over time and the volatility clustering around points and in this sense our methodology is a refinement of historical simulation. The results are backtested to verify the congruence of our models with the historic data we have. Along with simulating VaR, we have tried to find out correlation between the bonds and CDSs by using vector autoregression with a combination of principal component analysis and cointegration. Keywords— Value-at-Risk, Credit Default Swap, Portfolio, Simulation, Correlation.
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