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Measuring Risk in Fixed Payment Securities: An Empirical Test of the Structured Full Rank Covariance Matrix

Published online by Cambridge University Press:  06 April 2009

Jimmy E. Hilliard  and
Susan D. Jordan
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Abstract

The appropriate set of parameters determining the volatility of the value of a portfolio of fixed cash flows of arbitrary maturities is the covariance matrix of unexpected interest rate changes over the term. Equilibrium models of the term structure limit the rank of the covariance matrix and implicitly impose restrictions on covariance estimation. The “full information” approach to risk measurement imposes only time stationarity assumptions on covariance matrix estimators and can result in sample matrices of full rank. Hilliard and Jordan (1989) develop a structured full rank covariance matrix that depends on only two parameters. This paper tests the Hilliard-Jordan model using likelihood ratios and criteria of forecast accuracy.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 3 , September 1991 , pp. 345 - 362
Copyright
Copyright © School of Business Administration, University of Washington 1991

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