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A multi‐factor model for the risk management of portfolios
Author(s) -
Peterson Sandra,
Stapleton Richard C.
Publication year - 1999
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00090
Subject(s) - econometrics , portfolio , bond , exchange rate , interest rate , economics , stock exchange , mathematics , project portfolio management , short rate model , interest rate derivative , financial economics , monetary economics , finance , volatility (finance) , management , project management
We propose a methodology for modelling the value at risk of a complex portfolio, based on an extension of the Ho, Stapleton and Subrahmanyam technique. We model the variance‐covariance structure of up to seven variables. These could represent four country indices and three exchange rates, for example. In addition, the effect of an arbitrary number of orthogonal factors can be analysed. The system is illustrated by estimating the value at risk for a portfolio of international stocks where the factors are stock market indices and exchange rates, a portfolio of international bonds where the factors are interest rates as well as exchange rates, and a portfolio of interest rate derivatives in different currencies. In this last case, we model a two‐factor term structure of interest rates in each of the currencies, valuing the derivatives at a future date using these term structures and the Black model. The model is applied for different fineness of the binomial density and computational accuracy and efficiency are estimated. G13, G15, G21