Using Principal Components Analysis to Model Interest Rate Moves and Measure Delta Exposure: A Comprehensive Breakdown of a Lebanese Commercial Bank’s Portfolio

Viviane Y. Naimy

Journal of Applied Finance & Banking, 2015, vol. 5, issue 1, 9

Abstract: This paper quantifies exposure to all the possible ways the Lebanese yield curve changed since 2006. It studies the interest rate risk impact on a portfolio consisting of interest-rate depending assets belonging to a Lebanese commercial bank using principal components analysis or risk decomposition strategy. TBs monthly yields are used with five different maturities since 2006. Deltas for the portfolio are calculated using partial duration and the DV01. The first factor identified corresponds to a parallel shift in the yield curve and the second to a change of slope of the yield curve. Both factors account for 95% of the variance. Delta exposure calculations showed absence of hedging against these shifts.

Date: 2015
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