Journal of Risk

Scenario-based principal component value-at- risk when the underlying risk factors are skewed and heavy-tailed: an application to Italian banks' interest rate risk exposure

Roberta Fiori and Simonetta Iannotti


The paper develops a value-at-risk (VAR) methodology to assess Italian banks’ interest rate risk exposure. By using five years of daily data, the exposure is evaluated through a principal component VAR based on Monte Carlo simulation according to a parametric and a non-parametric approach. The main contribution of the paper is a methodology for modeling interest rate changes when underlying risk factors are skewed and heavy-tailed. The comparison of results with those resulting from the Basel II standardized approach shows that Basel II gives an adequate description of risk, provided that duration parameters are changed to reflect market conditions. Finally, the methodology is used to perform a stress testing analysis.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here