vi CONTENTS
3 Sensitivity Analysis of Portfolio Volatility:
Importance of Weights, Sectors and Impact of
Trading Strategies 47
Emanuele Borgonovo and Marco Percoco
3.1 Introduction 47
3.2 Sensitivity analysis background 50
3.3 Effect of relative weight changes 51
3.4 Importance of portfolio weights in GARCH volatility
estimation models 53
3.5 Empirical results: trading strategies through sensitivity
analysis 56
3.6 Conclusion 64
4 Managing Interest Rate Risk under Non-Parallel
Changes: An Application of a Two-Factor Model 69
Manuel Moreno
4.1 Introduction 69
4.2 The model 70
4.3 Generalized duration and convexity 72
4.4 Hedging ratios 74
4.5 A proposal of a solution for the limitations of the
conventional duration 75
4.6 Conclusion 83
5 An Essay on Stochastic Volatility and the
Yield Curve 86
Raymond Théoret, Pierre Rostan and
Abdeljalil El-Moussadek
5.1 Introduction 86
5.2 Variations on stochastic volatility and conditional
volatility 88
5.3 Interest rate term structure forecasting 92
5.4 Interest rate term structure models 92
5.5 Methodology 94
5.6 Data and calibration of the Fong and Vasicek model 97
5.7 Simulation 98
5.8 Empirical results 99
5.9 Conclusion 102
