Application of the Principal Component Value at Risk Model in Measuring Interest Rate Risk in the Non-Bank Financial Industry in Indonesia. Siti Saadah(a), Yohanes Berchman Suhartoko(b), Stanislaus S. Uyanto(c)
a,b,c) Faculty of Economics and Business, Atma Jaya Catholic University of Indonesia
Abstract
The non-bank financial industry portfolio is dominated by fixed income instruments so that their value is exposed to interest rate movements. Various interest rates tend to move simultaneously making this risk difficult to measure, so there are still few studies on this. In 2017 Indonesia received an upgrade to investment grade. This study also examines the impact of investment grade on interest rate risk. This study is to measure market risk originating from interest rate movements (interest rate risk). Non-bank financial service institutions with portfolios dominated by fixed income instruments will be highly exposed to interest rate movements. Principal Component Value at Risk (VaR) method is used on weekly yield government bonds data from the Bloomberg database with tenors of 5, 10, 15, 20, and 30 years with R language. This study found that the most important yield movement observed is the parallel shift pattern which produces the highest delta exposure. The portfolio faces greater interest rate risk exposure in the period before investment grade. Kupiec backtesting provides statistical evidence of the validity of the VaR model.
Keywords: Interest Rate Risk, Principal Component Analysis, Value at Risk, Yield curve
