Representative Yield Curve Shocks and Stress Testing
Posted: 14 Oct 2008 Last revised: 3 Jul 2012
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
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