| Abstract | Bonds historical returns can not be used directly to compute VaR by historical simulation because the maturities of the interest rates implied by the historical prices are not the relevant maturities at time VaR is computed. In this paper we adjust bonds historical returns so that the adjusted returns can be used directly to compute VaR by historical simulation. The adjustment is based on the prices, implied by the historical prices, at the times to maturity relevant for the VaR computation. Besides other features, we show that the obtained VaR values agree with the usual market trend of smaller times to maturity being traded with smaller interest rates, hence, carrying smaller risk and consequently having a smaller VaR. |
