he measurement of interest rate risks embedded in a trade or a portfolio plays a centrd role in the management of fixed-income portfolios.T Over the last decade, researchers and practitioners have developed a number of methodologies that quantlfjr the interest rate exposure of podolios and securities. Beyond duration, the most popular among them are value at risk (VaR) ("hskMetrics" [1995]), key rate duntions (Ho [1992]), principal components (factor) analysis (Litterman and Scheinkman [1991]), principal components durations (Wdlner [1996]), and yeld curve reshaping durations m, Ma, and Nozari [1992]).Each of these approaches has its pros and cons. Some are more intuitive than others; some are applicable to a broader universe of securities; others have proved to be merely an effective portfolio and risk management tool.This article attempts to uni@ these approaches and present them withln a comprehensive portfolio management framework. We begin by briefly summarizing the methodologies.The variance/covariance approach to value at risk is a cornerstone of J.P. Morgan's RiskMetrics'" methodology. First, for each security, a replicating portfolio of zero-coupon bonds is defined. Then, by using the term structure of historical volathty of spot rates and tke correlations between them, hskMetrics'M constructs a 95% confidence interval for the dollar return, thus determining the interval of "improbable losses." The drawbacks of this approach are that it is not dmectly 72
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