Date: Tuesday, October 28, 2014
Time: 11:00 am EDT | 4:00 pm BST | 11:00 pm HKT
Duration: 60 minutes
Abstract:
In this webcast, our experts will discuss how an accurate measure of market risk can help to inform institutions about the amount of capital needed to withstand a series of adverse market events, and improvements on assessing market risk for purposes of economic or regulatory risk based capital measurement. Their approach involves generating plausible historically‐based interest rate shocks, which can be applied to any market environment.
In the process of selecting a model, they examine variants of the Nelson‐Siegel approach to develop an improved yield curve approximation that overcomes the following challenges:
- Accurate description of observed patterns of yields
- Flexibility to handle intra-curve constraints
- Flexibility to handle inter-curve constraints
- Avoids negative forward rates
Based on these improvements, they adapt a 5‐factor parameterization developed by Bjork and Christensen (1999) and show it can accurately translate historical interest rate movements into plausible, current period shocks in any market environment. They also link the interest rate shocks to implied volatility using a novel parameterization of the swaption and cap volatility surfaces.
Together, the methodological changes discussed in this webcast should offer a more appealing alternative to industry stake holders while simultaneously promoting better risk management.
Key Learning Objectives:
- Present a robust empirical method for generating interest rate shocks, which can be used by risk managers and practitioners to measure the market risk of financial institutions.
- Show that current, commonly used industry practices for generating interest rate shocks using proportional or absolute changes have concerning limitations.
- Offer a means to impose intra- and inter-yield curve constraints to ensure plausible Treasury, Agency, and Libor-Swap interest rate movements.
- Provide a method to link realistic (historically-based, coherent, and internally consistent) interest rate changes to co-movements in other key market risk factors such as credit spreads or foreign exchange rates.
Moderator:
Jeffrey Kutler, Editor, Global Associaton of Risk Professionals (GARP)
Presenter:
Alexander Bogin Ph.D., Senior Economist, Federal Housing Finance Agency
William Doerner, Senior Economist, Federal Housing Finance Agency
