TITLE

Value at Risk for Philippine

Fixed Income Market
 INTRODUCTION

Research objectives
To develop an interest rate VaR model (OGARCH)
that best captures the volatility of Philippine
government yield curve.

To apply the resulting internal VaR model to the case

fixed-income portfolio

To examine the resulting internal VaR model given the

case fixed-income portfolio through a series of
backtesting models.

To recommend a systematic backtesting framework

for risk managers given the results of the study.
 METHODOLOGY

Philippine Interest Rate

Case Portfolio Evaluation
Modelling

DATA: Philippine Daily

Interest Rate with 12 tenors Portfolio Market
Backtesting
for the period Jan 2006 Value
Aug 2011

Orthogonal GARCH
VaR Model

Principal
Components
Analysis

ARCH LM Test

GARCH Modelling

Rolling Yield
Volatility Forecast
(Sept 2011 Aug
2012)
 PRINCIPAL
COMPONENTS

Principal Components Analysis: Proportion of Variance

Explained by the first 3PCs

Factors Eigenvalue Difference Proportion Cumulative

1 6.459 4.292 0.548 0.548

2 2.167 1.116 0.181 0.729

3 1.051 0.509 0.088 0.817

 DESCRIPTIVE STATISTICS &
STATISTICAL TESTS

Descriptive Statistics PC1 PC2 PC3

Mean 0.000 0.000 0.000
Median -0.003 0.002 0.001
Maximum 0.716 0.662 0.233
Minimum -0.543 -0.881 -0.129
Std. Dev. 0.060 0.059 0.019
Skewness 2.435 -0.072 1.331
Kurtosis 38 74 26
Jarque-Bera 73958 295738 30129
p-value 0.000 0.000 0.000
ARCH-LM 25 7 11
p-value 0.000 0.000 0.000
ADF -18 -18 -44
p-value 0.000 0.000 0.000
Observations 1392 1392 1392
 PRINCIPAL COMPONENT
TIME SERIES

PC1 PC2 PC3

.8 0.8 .25

0.6 .20
.6
0.4
.15
.4
0.2
.10
.2 0.0
.05
-0.2
.0
.00
-0.4
-.2 -.05
-0.6

-.4 -0.8 -.10

-.6 -1.0 -.15

I II III IV I II III IV I II III IV I II III IV I II III IV I II III I II III IV I II III IV I II III IV I II III IV I II III IV I II III I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011

GARCH Modelling : EGARCH (1,1) symmetric Students T Distribution

 PORTFOLIO MARKET VALUE

Bond Maturity Face

Number Bond Name Tenor Date TtM cpn Amount
Bond 1 PIBD1016I420 10 04-Sep-16 5 9.13% 66,869
Bond 2 PIBD1019B485 10 19-Feb-19 7 7.85% 73,451
Bond 3 PIBD1020L525 10 16-Dec-20 9 5.88% 33,093
Bond 4 PIBD2024K091 20 11-Nov-24 13 13.75% 3,373
Bond 5 PIBD2525K015 25 29-Nov-25 14 18.25% 6,753
Bond 6 PIBD2028L151 20 04-Dec-28 17 9.50% 17,585
Bond 7 PIBD2530G029 25 28-Jul-30 19 12.50% 5,981
Bond 8 PIBD2031G171 20 19-Jul-31 20 8.00% 255,837
Bond 9 PIBD2534K062 25 05-Nov-34 23 9.25% 30,842
Bond 10 PIBD2535L086 25 16-Dec-35 24 8.13% 166,010
659,795
PORTFOLIO OGARCH
VAR MODEL
 BACKTESTING

Frequency Test
Exceedance Traffic Light POF-test TUFF-test
Portfolio 2 Green Accepted Accepted
Bond3 1 Green Accepted Accepted
Bond4 2 Green Accepted Accepted
Bond5 1 Green Accepted Accepted
Bond6 1 Green Accepted Accepted
Bond7 4 Green Accepted Accepted
Bond8 4 Green Accepted Accepted
Bond9 6 Yellow Accepted Accepted
Bond10 9 Yellow Rejected Accepted

Zone Expected Exceedance

Green 0-4
Yellow 5-9
Red 10-more
 BACKTESTING

= ( + )

Christoffersen Interval Forecast

Test Critical Test Critical
Statistic Value Statistic Value
LR Ind X2 Test Outcome LR CC X2 Test Outcome
Portfolio 0.03 3.84 Accepted 0.12 5.99 Accepted
Bond3 0.01 3.84 Accepted 1.11 5.99 Accepted
Bond4 0.03 3.84 Accepted 0.12 5.99 Accepted
Bond5 0.01 3.84 Accepted 1.11 5.99 Accepted
Bond6 0.01 3.84 Accepted 1.11 5.99 Accepted
Bond7 4.07 3.84 Rejected 4.91 5.99 Accepted
Bond8 4.07 3.84 Rejected 4.91 5.99 Accepted
Bond9 2.39 3.84 Accepted 6.12 5.99 Rejected
Bond10 9.75 3.84 Rejected 20.30 5.99 Rejected
 BACKTESTING

= +

Mixed Kupiec
Test Critical Test Critical
Statistic Value Statistic Value
LR Ind X2 Test Outcome LR Mix X2 Test Outcome
Portfolio 0.59 5.99 Accepted 0.67 7.81 Accepted
Bond3 0.00 3.84 Accepted 1.10 5.99 Accepted
Bond4 0.04 5.99 Accepted 0.13 7.81 Accepted
Bond5 0.00 3.84 Accepted 1.10 5.99 Accepted
Bond6 0.00 3.84 Accepted 1.10 5.99 Accepted
Bond7 12.48 9.49 Rejected 13.32 11.07 Rejected
Bond8 12.48 9.49 Rejected 13.32 11.07 Rejected
Bond9 15.10 12.59 Rejected 18.83 14.07 Rejected
Bond10 41.02 16.92 Rejected 51.57 18.31 Rejected
MARKET RISK CHARGE
 CONCLUSION

1. Modelling volatility dynamics of the three principal

components is adequate to capture the volatility of
the entire Philippine term structure of interest rate.
2. The best GARCH model is EGARCH(1,1)-st which is the
same for all three PCs.
3. On the portfolio level, the OGARCH-VaR model is
considered accurate by regulators as it falls into the
green zone of the Basels Traffic Light Approach.
4. However, for major local banks bound by regulatory
constraint, it is interesting to note that in some ways it
is more advantageous to employ the standardized
approach, which produced a lower risk capital
allocation.
 RECOMMENDATION

REGULATOR:
BAD New VaR Model
Traffic Light Approach

GOOD

Kupiecs POF Test

Mixed Kupiec Test GOOD Test of Independence
(Separately)

BAD

PROBLEM:
Kupiecs POF Test GOOD
Exceptions are Dependent

BAD

FREQUENCY PROBLEM:
a. underestimate VaR PROBLEM:
b. overestimate VaR GOOD Incorrect Coverage

Test of Independence

BAD

PROBLEM:
Incorrect Coverage
Exceptions are Dependent
 RECOMMENDATIONS

Compare to other VaR models such as Historical

Simulation and Monte Carlo Simulation.
Include complementary risk measures such as
Expected Shortfall and Stress Testing.
Extend estimation period.
Include other assets, such as equities and
currencies.
 THE END..

THANK YOU.