Advances in Fixed Income Valuation Modeling and Risk Management (Frank J. Fabozzi Series) [Hardcover]

Frank J. Fabozzi CFA (Author)

Book Description

Series: Frank J. Fabozzi Series | Publication Date: January 1997

Advances in Fixed Income Valuation Modeling and Risk Management provides in-depth examinations by thirty-one expert research and opinion leaders on topics such as: problems encountered in valuing interest rate derivatives, tax effects in U.S. government bond markets, portfolio risk management, valuation of treasury bond futures contract's embedded options, and risk analysis of international bonds.

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From the Back Cover

Advances in Fixed Income Valuation Modeling and Risk Management provides in-depth examinations by thirty-one expert research and opinion leaders on topics such as: problems encountered in valuing interest rate derivatives, tax effects in U.S. government bond markets, portfolio risk management, valuation of treasury bond futures contract’s embedded options, and risk analysis of international bonds.

About the Author

Frank J. Fabozzi is a financial consultant, editor of the Journal of Portfolio Management, and Adjunct Professor of Finance at Yale University's School of Management.

Product Details

• Hardcover: 391 pages
• Publisher: Wiley; 1 edition (January 1997)
• Language: English
• ISBN-10: 1883249171
• ISBN-13: 978-1883249175
• Product Dimensions: 9.2 x 6.3 x 1 inches
• Shipping Weight: 1.6 pounds (View shipping rates and policies)
• Average Customer Review: 3.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #2,624,271 in Books (See Top 100 in Books)

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2 of 2 people found the following review helpful:

3.0 out of 5 stars Somewhat out of date, December 13, 2006

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Dr. Lee D. Carlson (Baltimore, Maryland USA) - See all my reviews
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This review is from: Advances in Fixed Income Valuation Modeling and Risk Management (Frank J. Fabozzi Series) (Hardcover)

Due to its date of publication, the contents of this book may perhaps be viewed as somewhat out of date. Due to the existence and nature of the new mortgage products that have appeared on the market since the book was written, this view is somewhat justified. However, there are many concepts in the book, along with mathematical tools, that are still of interest today or used explicitly. Most of the conceptual foundations of the financial engineering of fixed-income securities have remained intact, although more emphasis is now being placed on the dynamic nature of risk. In decades past the canonical measures were that of the Macaulay duration, yield-to-maturity, and nominal spread. Currently the emphasis is on concepts such as the effective duration, effective convexity, and option-adjusted spreads. The latter are more dynamic in nature and are connected to the sensitivity of the price of a bond to changes in interest rates. Some of the articles in this book argue for the need to use additional risk measures that will quantify in more detail the sensitivity of a portfolio to changes in other variables. One of these is the prepayment uncertainty, which is defined as the sensitivity of the price of a mortgage-backed security (MBS) to a change in the projected prepayment speeds. These projections typically come from mathematical or simulation models, which are estimates of the expected prepayment rates along a specified path of interest rates. A measure of this prepayment uncertainty can be done using the concept of 'prepayment duration'. A description is given for its calculation, and is the same as the one currently used in most implementations of prepayment model risk in the mortgage industry. Other risk measures discussed in the book include zero volatility spread and spread duration.

The importance of risk analysis has been realized for a few centuries, but it has only been in the last few decades that it has been given a strong mathematical foundation. Indeed, the development of risk models is now a multi-million dollar industry, and there are myriads of vendor products that are available for the different financial sectors. For fixed-income securities, the definitions of risk are essentially the same as for other financial instruments, and some of these definitions are discussed in this book. Probability theory plays a central role of course, along with the standard statistical measures of dispersion, such as the standard deviation, which measures the 'volatility' or uncertainty of returns on investment. Other definitions of risk that are discussed in the book include the 'downside risk' that deals only with returns that are located below the mean. Also included in the book are discussions of what quantities are not good measures of fixed-income risk. One author for example argues that duration is not a good measure, in spite of its being used extensively as such. Duration measures `exposure' to risk, rather than risk itself, the author states.

There are therefore many discussions in the book that are helpful from the standpoint of current needs in risk management and mortgage and asset-backed securities. The more sophisticated or complex a portfolio, the more sophisticated the risk measure must be, but still staying within the constraints of computability. Risk models have indeed become very sophisticated, and have employed tools coming from artificial intelligence and highly advanced mathematics. Errors in the models will of course also contribute to the risk, and so some means, outside the model, must be used to quantify this risk. This motivates the development of model and proof checkers, and other tools that check model sensitivity. All of these checks and balances, along with the models themselves, are approaching levels of complexity that are taxing the abilities of risk managers. One can expect this to continue for many years to come.