For the analysis of obligor-specific and market-sector-specific influence on bond price risk we make use of the following subdivision of ``price risk'', Gaumert (1999), Bundesaufsichtsamt für das Kreditwesen (2001).
Residual risk and event risk form the two components of so-called specific price risk or specific risk -- a term used in documents on banking regulation, Bank for International Settlements (1998a), Bank for International Settlements (1998b) -- and characterize the contribution of the individual risk of a given financial instrument to its overall risk.
The distinction between general market risk and residual risk is not unique but depends on the choice of the benchmark curve, which is used in the analysis of general market risk: The market for interest rate products in a given currency has a substructure (market-sectors), which is reflected by product-specific (swaps, bonds, etc.), industry-specific (bank, financial institution, retail company, etc.) and rating-specific (AAA, AA, A, BBB, etc.) yield curves. For the most liquid markets (USD, EUR, JPY), data for these sub-markets is available from commercial data providers like Bloomberg. Moreover, there are additional influencing factors like collateral, financial restrictions etc., which give rise to further variants of the yield curves mentioned above. Presently, however, hardly any standardized data on these factors is available from data providers.
The larger the universe of benchmark curves a bank uses for modeling its interest risk, the smaller is the residual risk. A bank, which e.g. only uses product-specific yield curves but neglects the influence of industry- and rating-specific effects in modelling its general market risk, can expect specific price risk to be significantly larger than in a bank which includes these influences in modeling general market risk. The difference is due to the consideration of product-, industry- and rating-specific spreads over the benchmark curve for (almost) riskless government bonds. This leads to the question, whether the risk of a spread change, the spread risk, should be interpreted as part of the general market risk or as part of the specific risk. The uncertainty is due to the fact that it is hard to define what a market-sector is. The definition of benchmark curves for the analysis of general market risk depends, however, critically on the market sectors identified.
We will not
further pursue this question in the following but
will instead investigate some properties of this spread risk and draw
conclusions for modeling spread risk within internal risk models. We restrict ourselves to the
continuous changes of the yield curves and the spreads, respectively, and do not discuss event risk.
In this contribution different methods for the quantification of the risk
of a fictive USD zero bond are analyzed. Our investigation is based on
time series of daily market yields of US treasury bonds and US bonds (banks and industry) of different
credit quality (rating) and time to maturity.