Dear all, I now try to calculate the factor VAR for my fixed income portfolio. The factor VAR assumes that each and every asset in the portfolio has an exposure on a set of the same factors. It’s greatest advantage is no need to calculate too many volatilities and correlations ( I have some 70 bonds in the portfolio so you can imagine the size of variance-covariance matrix). All you need is a restricted set of vols and corrs for the factors you choose. One another advantage IMHO for a bond portfolio is that these factors are quite simple and observable: base rates and credit spreads are good candidates. On the other hand historical var can be hard to calculate because too many bonds are new or illiquid or have strange history or whatever. So my approach is to regress yield of a bond or a set of similar bonds to base rates and spreads to move from yields of bonds to factors sets. Sounds simple and logical. But when doing so I faced with heteroscedasticity, which is as we know a norm in reality (while homoscedasticity is a more ideal world). As a result I just can not regress them. I am sure that the base rates and credit spreads are the leading factors which can explain 90% of volatility of each bond in the portfolio. But this heteroscedasticity is something I just don’t know how to handle. Can anyone advice?