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Monte Carlo var under reinvestment risk
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Orientador(es)
Resumo(s)
This study aims to develop a model for calculating the Value at Risk for the Sociedade
Gestora dos Fundos de Pensões do Banco de Portugal (SGFPBdP)’s own-asset portfolio
using a Monte Carlo simulation-based framework. The primary objective of the model is
to incorporate features typically excluded from traditional Value at Risk (VaR) methods,
such as the hold-to-maturity assumption for fixed income instruments, reinvestment risk
associated with maturing instruments, and eventual expectations regarding future market
conditions.
A detailed explanation of the Monte Carlo simulation-based framework is provided to
clarify the methodology employed. This framework can be applied to calculate VaR over
different time horizons. In the report, VaR is calculated and analysed for the following
horizons: one business day, 20 business days, and 230 business days. The results are
then compared with those obtained from the traditional Parametric method, based on the
RiskMetrics framework, to evaluate whether the adjustments introduced by the model
deliver the intended improvements.
Both models produce similar results over short-term horizons. However, over longer
time horizons, the limitations of the traditional Parametric model become increasingly
evident.
The internal methodology proves to be more accurate and better aligned with real
investment conditions, precisely because it successfully delivers the features originally
intended in its design: (1) it effectively captures the dynamics of holding fixed income
instruments to maturity, including pull-to-par effects and reinvestment risk; and (2) it
allows for the incorporation of expectations regarding future market conditions.
Descrição
Palavras-chave
Value at Risk Monte Carlo Reinvestment Risk Maturity Market Conditions
Contexto Educativo
Citação
Henriques, Rita Gonçalves (2025). “Monte Carlo var under reinvestment risk”. Dissertação de Mestrado. Universidade de Lisboa. Instituto Superior de Economia e Gestão
Editora
Instituto Superior de Economia e Gestão