Flylets and invariant risk metrics

Kharen Musaelian, Santhanam Nagarajan and Dario Villani show how to build robust risk metrics for bond returns

villani-fig1

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The highly correlated nature of bond returns creates a particular challenge for the portfolio management of interest rate products. Unlike stock portfolios, in which large idiosyncratic components of single name returns limit the amount of concentration and leverage, interest rate strategies rely on large and varying amounts of leverage and have limited avenues for diversification. This makes it especially valuable to create a parsimonious representation of risk that

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