Component proponents II

Christophe Pérignon and Christophe Villa propose a novel method of extracting the risk factors driving interest rates that allows both the covariance matrix of interest rates and the variances of the risk factors to vary through time. To illustrate the technique, they present a multi-shift duration measure that is based on the extracted risk factors. Further, they empirically show that factor-based risk management techniques that ignore the time-varying nature of the covariance of interest rates are likely to provide erroneous risk assessments

Click Here To Download PDF