Representative Yield Curve Shocks and Stress Testing

Posted: 14 Oct 2008 Last revised: 3 Jul 2012

See all articles by Christophe Villa

Christophe Villa

Audencia Nantes School of Management

Christophe Pérignon

HEC Paris - Finance Department

Date Written: October 10, 2008

Abstract

In this paper we propose a systematic procedure to identify a set of representative yield curve shocks and use them for stress-testing purposes. We first fit a factor model to actual bond yields and estimate the main shape factors of the yield curve. We then partition the factors into non-overlapping sets of representative shocks. The key feature of our procedure is that it provides a wide variety of yield curve shocks including typical, uncommon, and extreme ones. We apply our methodology to a variety of bond strategies using actual U.S. yields.

Keywords: Risk Management, Yield curve, Interest Rate Risk, Stress-Testing

Suggested Citation

Villa, Christophe and Pérignon, Christophe, Representative Yield Curve Shocks and Stress Testing (October 10, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI, Available at SSRN: https://ssrn.com/abstract=1282105 or http://dx.doi.org/10.2139/ssrn.1282105

Christophe Villa (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

HOME PAGE: http://www.audencia.com/?id=970

Christophe Pérignon

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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