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Policy Discussion Paper, Vol. PDP, No. 2022-01, May 2022 Crossref
Market Risk in UST Securities and Futures: How Much Did Volatility Increase in March of 2020 Through the Lens of Filtered Historical Simulation Value-at-Risk Models?

(Revised June 2022)

Market volatility increased substantially in March of 2020 as financial market participants reacted to the risk of Covid-19. Even the market for U.S. Treasury securities, long considered a safe haven and one of the most liquid debt instruments in the world, experienced large swings in volatility. In this policy discussion paper, I demonstrate that as volatility increased, model estimates of the market risk increased as well. First, I will explain the background on filtered historic simulations Value-at-Risk (VaR) modeling. This is followed by an overview of the assessment methodology, and analysis on the impact to U.S. Treasury exchange traded funds (ETFs) and futures during March of 2020. Lastly, I provide a historical comparison of market volatility. The findings are that market risk during March of 2020 increased quickly in both the Treasury securities and futures markets, and market risk was higher in the Treasury securities market in comparison to the Treasury futures market.

Policy discussion papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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