Rotation Risk in Yield Curve

nahkhash · February 17th, 2014, 1:18 am

Can some explain to me the concept of rotation risk in yield curve and how it is computed as a part of interest rate risk management?

bearish · February 17th, 2014, 10:50 pm

I think you have to be more specific. I can think of a couple of plausible, but completely different, interpretations. One would be the notion of investors rotation out of bonds into stocks, which would presumably result in higher interest rates. The other would be something along the lines of a typical second principal component move where the term structure rotates around a point in the 5-15 year range, i.e. a curve flattening/steepening.

nahkhash · February 17th, 2014, 10:56 pm

Thanks for your response - I was looking for the second part of your reply where the term structure rotates around a point in the curve. Can you explain that further ?

chilun · February 17th, 2014, 11:50 pm

The rotation risk impact is covered in historical simulation value-at-risk. FI usually has stress test scenarios specific for rotation risk too.