Book on VaR on callable fixed income securities

[Mathias]

Hi,

I am looking for literature on computing VaR of a portfolio with callable mortgage backed securities.

I know that some model it as a fixed coupon bond and a short position in an american call option but this does not seem to capture the behaviour in practice! Do you have any suggestions where to start - which articles, books etc.?

 

[Mathias]

Ken Abbott do you have any suggestions on how to compute VaR on callable fixed income securities? I have looked at different papers that explains different approaches to VaR but nothing that deals with this particular issue

 

[Ken Abbott]

Ken Abbott do you have any suggestions on how to compute VaR on callable fixed income securities? I have looked at different papers that explains different approaches to VaR but nothing that deals with this particular issue

On a portfolio basis, it's generally ok to use the local pv01. While the price/yield line will kink at the strike, this impact is muted at the portfolio level.

In addition, many risk systems wil report pv01 on a yield-to-worst basis, so the call effect will be captured.