A multidimensional approach to interest rate risk in the Dominican Republic: looking beyond VaR

Second Annual Risk Conference 2024

What it is about

Alerso Pimentel, CFA and CQF, explained at the Second Annual Risk Conference (September 27, 2024) why value at risk (VaR) is not enough to understand interest rate risk in the Dominican Republic and proposed evaluating it in three dimensions: the market, the stakeholders and the policy makers.

The 35-slide presentation, very visual in nature, questions whether all the information in the profit and loss distribution fits in a single number, and then covers public debt management and the primary market, the microstructure of the secondary market, the market makers program, the importance of market depth and the contribution of duration to investors' returns.

Objectives

Question the limits of VaR as the sole measure of interest rate risk.
Show how the design of the primary and secondary markets conditions interest rate risk in the country.
Set out what falls to treasuries, risk areas, the monetary authority and regulators.

Key takeaways

VaR is a universal language, but summarizing the information in the profit and loss distribution in one number is a simplification; hence the proposal to look at the market, the stakeholders and the policy makers.
Managing public debt with a medium-term strategy (financing budget needs, minimizing cost subject to a tolerable level of risk and deepening the domestic market) reduces volatility.
Primary market activity of the Ministry of Finance explains about 30% of the growth in secondary market volumes, hence the importance of reopening benchmark issues.
Market depth (market makers program, derivatives, hedging) is key to absorbing exchange rate and liquidity pressures.
Interest rate risk explains about 95% of the market risk of the Dominican financial system's investment portfolio, so it is central to financial stability.