Canadian Zero-Coupon Bond Curve Shocks and Stress Testing

The yield curve movements have been the subject of many researches. As it is shown that the yield curve has the power to reflect major macroeconomic factors, the changes on it has been studied to predict future returns on portfolios and to identify some unusual events such as financial crisis. In this paper, a systematic procedure to identify yield curve shocks are presented mainly using the level, slope and curvature factors in the yield curves. The extreme changes happened in the level, slope, and curvatures are then provided for the stress testing purposes. This procedure should be simply applicable for any zero-coupon yield curve data, so the same tests are suggested for other curves to show this can be widely acceptable.