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

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  • Tu, Anthony H.
  • Chen, Cathy Yi-Hsuan

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.

Suggested Citation

  • Tu, Anthony H. & Chen, Cathy Yi-Hsuan, 2018. "A factor-based approach of bond portfolio value-at-risk: The informational roles of macroeconomic and financial stress factors," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 243-268.
  • Handle: RePEc:eee:empfin:v:45:y:2018:i:c:p:243-268
    DOI: 10.1016/j.jempfin.2017.11.010
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    More about this item

    Keywords

    Nelson–Siegel factor-augmented model; Value-at-risk; Backtests; Conditional predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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