A factor risk model with reference returns for the US dollar and Japanese yen bond markets

Carlos Bernadell, Joachim Coche and Ken Nyholm

No 641, Working Paper Series from European Central Bank

Abstract: This paper develops a new methodology for simulating fixed-income return distributions. It is shown that a traditional factor risk model, when augmented with reference returns, is capable of generating visually consistent return distributions for a broad range of fixed income instruments such as government and nongovernment instruments in the US dollar and Japanese yen bond markets. The reference returns result from a regime-switching Nelson-Siegel yield curve model following Bernadell, Coche and Nyholm (2005). Empirical results are encouraging: simulated distributions exhibit most characteristics observed in the fixed income markets such as non-normal right-skewed distributions for short maturity instrument while instruments with longer maturity are closer to being normally distributed. JEL Classification: C15, C32, C53, G11, G15

Keywords: factor risk model; regime switching; scenario analysis (search for similar items in EconPapers)
Date: 2006-06
Note: 443961
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006641

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