Date of Publication

2013

Document Type

Master's Thesis

Degree Name

Master of Science in Financial Engineering

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Neriza M. Delfino

Defense Panel Chair

Junette A. Perez

Defense Panel Member

Angelito Bala
Milkos Patrick B. Zalameda

Abstract/Summary

The study proposes an internal Value at Risk methodology to assess major Philippine banks interest rate risk exposure. The term structure of volatility of Philippine Fixed Income Market is estimated through orthogonal GARCH model pioneered by Alexander and Chibumba (1997). For practical application in the Philippine setting, a case portfolio representative of a major local bank was created. The portfolio comprised of 10 Treasury Bonds with varying time-to-maturity. Resulting OGARCH-VaR model was applied to the case portfolio to test the performance of the model. The methodology is implemented on a one-year holding period in order to perform a series of backtesting models which includes Basels Traffic Light Backtesting, Kupiecs proportion of failures-test (POF-test), Christoffersens interval forecast test and Haas (2001) mixed Kupiec-test. Results observed in the study shows that the risk measure proposed provides an adequate unconditional coverage and independence property of exceptions. In an effort to further investigate the characteristic of the model, Value at Risk was computed for both portfolio and individual security level. In addition, the study also compared the capital requirement estimated by OGARCH-VaR model with Basels Standardized Approach market risk charge. The proposed internal VaR applied in the Philippine term structure of interest rates may be considered promising as it captures the volatility trend of the portfolio PnL during the most volatile period in the market. However, high volatility also translates to higher VaR which converts to inflated market risk capital charge. Given that major local banks are 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. In effect, it may be concluded that regulators penalizes reactive models that generates high VaR values during instability, and in turn, rewards insensitive models with consistently low VaR values with perpetually low risk capital requirement.

Abstract Format

html

Language

English

Format

Electronic

Accession Number

CDTG005373

Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

1 computer optical disc, 4 3/4 in.

Keywords

Interest rate risk—Philippines; Fixed-income securities—Philippines

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