What is the difference between term structure and non-term structure risk factors?
What will be an ideal response?
Systematic risk factors can be divided into two categories: term structure risk factors and
non-term structure risk factors. Term structure risk factors are risks associated with changes in the shape of the term structure (level and shape changes). Non-term structure risk factors include sector risk, quality risk, optionality risk, coupon risk, MBS sector risk, MBS volatility risk, and MBS prepayment risk.Sector risk is the risk associated with exposure to the sectors of the benchmark index. Quality risk is the risk associated with exposure to the credit rating of the securities in the benchmark index. Optionality risk is the risk associated with an adverse impact on the embedded options of the securities in the benchmark index. Coupon risk is the exposure of the securities in the benchmark index to different coupon rates. MBS sector risk is the exposure to the sectors of the MBS market included in the benchmark. MBS volatility risk is the exposure of a benchmark index to changes in expected interest-rate volatility. MBS prepayment risk is the exposure of a benchmark index to changes in prepayments.
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What will be an ideal response?
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What will be an ideal response?