Shape factors and cross-sectional risk

Andrea Roncoroni (), Stefano Galluccio and Paolo Guiotto
Additional contact information
Andrea Roncoroni: ESSEC Business School
Paolo Guiotto: Unipd - Università degli Studi di Padova = University of Padua

Post-Print from HAL

Abstract: Galluccio and Roncoroni (2006) empirically demonstrate that cross-sectional data provide relevant information when assessing dynamic risk in fixed income markets. We put forward a theoretical framework supporting that finding based on the notion of "shape factors". We devise an econometric procedure to identify shape factors, propose a dynamic model for the yield curve, develop a corresponding arbitrage pricing theory, derive interest rate pricing formulae, and study the analytical properties exhibited by a finite factor restriction of rate dynamics that is cross-sectionally consistent with a family of exponentially weighed polynomials. We also conduct an empirical analysis of cross-sectional risk affecting US swap, Euro bond, and oil markets. Results support the conclusion whereby shape factors outperform the classical yield (resp. price) factors (i.e., level, slope, and convexity) in explaining the underlying fixed income (resp. commodity) market risk. The methodology can in principle be used for understanding the intertemporal dynamics of any cross-sectional data.

Keywords: Risk Measures; Factor Analysis; Cross-Sectional Analysis; Interest Rates (search for similar items in EconPapers)
Date: 2010-09-29
Note: View the original document on HAL open archive server: https://hal.science/hal-00736733
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Journal of Economic Dynamics and Control, 2010, 34 (11), pp.2320. ⟨10.1016/j.jedc.2010.06.002⟩

Downloads: (external link)
https://hal.science/hal-00736733/document (application/pdf)

Related works:
Journal Article: Shape factors and cross-sectional risk (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00736733

DOI: 10.1016/j.jedc.2010.06.002

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().