An analysis of risk for defaultable bond portfolios

Abstract

We propose to estimate Value at Risk (VaR) using quantile regression and provide a risk analysis for defaultable bond portfolios. Design/Methodology/approach: The method we propose is based on quantile regression pioneered by Koenker and Bassett (1978). The quantile regression approach allows for a general treatment on the error distribution and is robust to distributions with heavy tails. Findings: We provide a risk analysis for defaultable bond portfolios using quantile regression method. In the proposed model we use information variables such as short term interest rates and term spreads as covariates to improve the estimation accuracy. We also find that confidence intervals constructed around the estimated VaRs can be very wide under volatile market conditions, making the estimated VaRs less reliable when their accurate measurement is most needed. Original/value: Provide a risk analysis for defaultable bond using quantile regression approach.

Applying multivariate-fractionally integrated volatility analysis on emerging market bond portfolios

“…Therefore, referring to studies on other asset classes, especially those dealing with the developed market bonds, is the only plausible way. Guo et al (2007) applied quantile VaR to U.S. corporate bond indices and incorporated treasury interest rates as information variables. Although using these information variables was beneficial, the estimated confidence intervals for VaRs were wide, thus downgrading the applicability of the model.…”

Impact of bond profile on bond volatility: Evidence from India

“…~ 70 ~ Risk-averse investors exhibit a preference for allocating their capital towards established enterprises that has a proven track record of consistently earning profits. When evaluating risk mitigation strategies, having a thorough understanding of bond volatility offers substantial advantages (Guo et al, 2007) [6] . By comparing and contrasting different categories of bonds, such as secured and unsecured bonds, as well as convertible and nonconvertible bonds, it is plausible for investors to better analyse their bond investments.…”