The main purpose of this paper is to show how a plain vanilla floating rate note (FRN) could have very high market risk, measured by Value at Risk, in presence of serious concerns about creditworthiness of the issuer. The issuer taken under consideration is Lehman Brothers and the analysis focuses expecially on the period before its failure, which was indeed a very critical period for the US bank system. The FRN considered was part of a list of bonds declared low risk/return by a consortium of italian banks called Patti Chiari. One of the requirement for a bond to be in the list was to have a low Value at Risk, not above a certain threshold, that was set at 0.3125% for the one-day 99% VaR. Italians investors, that lost their capitals after Lehman default, have been in dispute with their banks and with the Patti Chiari consortium because they argue that the VaR of their bonds had exceeded, from some months, the maximum threshold and therefore that those bonds would have to come out of the list. A simple and direct backtesting unequivocally shows that those cases have a foundation, in particular for the bond XS0189741001 which this document deals with. That is, that any measure of one-day 99% VaR that falls within the maximum limit of 0.3125% can be declared wrong with a margin of error close to zero.
Value at Risk of a Lehman Bond
Flavio Angelini
2019
Abstract
The main purpose of this paper is to show how a plain vanilla floating rate note (FRN) could have very high market risk, measured by Value at Risk, in presence of serious concerns about creditworthiness of the issuer. The issuer taken under consideration is Lehman Brothers and the analysis focuses expecially on the period before its failure, which was indeed a very critical period for the US bank system. The FRN considered was part of a list of bonds declared low risk/return by a consortium of italian banks called Patti Chiari. One of the requirement for a bond to be in the list was to have a low Value at Risk, not above a certain threshold, that was set at 0.3125% for the one-day 99% VaR. Italians investors, that lost their capitals after Lehman default, have been in dispute with their banks and with the Patti Chiari consortium because they argue that the VaR of their bonds had exceeded, from some months, the maximum threshold and therefore that those bonds would have to come out of the list. A simple and direct backtesting unequivocally shows that those cases have a foundation, in particular for the bond XS0189741001 which this document deals with. That is, that any measure of one-day 99% VaR that falls within the maximum limit of 0.3125% can be declared wrong with a margin of error close to zero.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
