Transformations  in
Business & Economics

FIXED INCOME PORTFOLIO MANAGEMENT BY USING VAR METHOD
Povilas Aniunas, Gailute Gipiene, Mantas Valukonis, Mindaugas Vijunas

ABSTRACT. The purpose of this article is to create fixed income portfolio risk assessment model which would let to separate portfolio's credit and market risk components. Literature analysis led to the formation of fixed income portfolio risk assessment model assumptions. It has been found that, although fixed income portfolio management is studied quite a lot in the academic literature, the risk assessment methodology is used to measure only the market risk without the credit risk separation. According to the characteristics of the selected methods, the risk assessment model consists of combining the VaR methodology, modified duration measure and the use of future contracts for portfolio hedging. In risk assessment model, the interest rate risk is converted in to the future contracts, and the risk assessment is made by portfolio open interest rate position. The back testing results of fixed income portfolio risk assessment model has shown that there were no deviations, or they did not exceed 1 percent of the permissible limit for more than one year. These results suggest that the model let to assess the fixed income portfolio risk properly and reliably .

KEYWORDS: fixed income securities, interest rate risk, credit risk, VaR method, portfolio hedging using future contracts.

JEL classification: G11.