Jul 30

Mapping a fixed income portfolio (Intro VaR Mapping) – 8 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

Why map portfolios to risk factors? It's a shortcut because portfolios are complicated; e.g., even delta-normal VaR employing a covariance matrix contains n(n+1)/2 pair-wise correlations in a dreaded "curse of dimensionality." The reality of a portfolio's true risk exposure is both ultimately unknowable and undeniably complex. Mapping reduces the portfolio to a few key characteristics. The approximation sacrifices accuracy but makes the portfolio amenable to, say, stress testing.

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Here is an explanation of Jorion's three approaches to mapping a bond portfolio:

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