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A New Measure of Cross-Sectional Risk and its Empirical Implications for Portfolio Risk Management

43 Pages Posted: 2 Mar 2005 Last revised: 12 Nov 2015

Andrea Roncoroni

ESSEC Business School

Stefano Galluccio

BNP Paribas Fixed Income


Litterman, Scheinkman, and Weiss (1991) and Engle and Ng (1993) provide empirical evidence of a relation between yield curve shape and volatility. This study offers theoretical support for that finding in the general context of cross-sectional time series. We introduce a new risk measure quantifying the link between cross-sectional shape and market risk. A simple econometric procedure allows us to represent the risk experienced by cross-sections over a time period in terms of independent factors reproducing possible cross-sectional deformations. We compare our risk measure to the traditional cross-yield covariance according to their relative performance. Empirical investigation in the US interest rate market shows that 1) cross-shape risk factors outperform cross-yield risk factors (i.e., yield curve level, slope, and convexity) in explaining the market risk of yield curve dynamics; 2) hedging multiple liabilities against cross-shape risk delivers superior trading strategies compared to those stemming from cross-yield risk management.

Keywords: Risk Measures, Risk Management, Factor Analysis, Cross-Sections, Interest Rates

JEL Classification: C31, E43, G11

Suggested Citation

Roncoroni, Andrea and Galluccio, Stefano, A New Measure of Cross-Sectional Risk and its Empirical Implications for Portfolio Risk Management. EFA 2005 Moscow Meetings Paper; Journal of Banking and Finance, Vol. 30, No. 8, 2006. Available at SSRN: or

Andrea Roncoroni (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch BP 50105
Cergy-Pontoise, 95021
+33 (0)1 34 43 32 39 (Phone)
+33 (0)1 34 43 30 01 (Fax)


Stefano Galluccio

BNP Paribas Fixed Income ( email )

10, Harewood Avenue
NW1 6AA London
United Kingdom

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