Thomas Lejeune

A Note on the Use of the Modified Value-at-Risk

While modified value-at-risk (or Cornish–Fisher value-atrisk) has been quite extensively used by practitioners and academics since its introduction, the authors show that it can be consistently used only over a limited interval of confidence levels. Confidence levels below 95.84% should never be used if one wishes to be consistent with investors’ preferences for kurtosis. In addition, the use of higher confidence levels is restricted by the value of the skewness. Failure to respect these restrictions on confidence levels results in misassessing risk and potentially overweighting assets that exhibit undesirable properties in terms of higher moments.

Comoment Risk in Corporate Bond Yields and Returns

This paper provides a comoment factor analysis of corporate bond returns using sector index bond portfolios. Corporate bond excess default return are decomposed into systematic default risk premiums rewarding investors for exposure to default risk and net excess returns adjusting for actual market conditions. Higher order comoments contribute positively to systematic default risk premiums. Furthermore, covariance and cokurtosis lower net excess returns as they trigger more value losses. We show a gradual substitution effect between covariation and tail risk contributions to the systematic risk premium for higher maturities, indicating a shift from the pricing of downgrading to outright default risk.