I'm trying to calculate var for a portfolio of fixed income securities. I initially want to just calculate undiversified VaR for each instrument. I'm doing the following for each instrument
- Take historical daily log returns on YTM for coupon bond for say 2 years
- calculate mean and stdev as usual
- calculate VaR (change in yield) as -2.326*stdev(ln returns of YTM) + mean(ln returns of YTM)
- this as I understand is the 99% percentile of log returns of YTM which i then multiply with latest YTM to get actual change in yield
- Use duration formula i.e Change in price = Price * -Mod Duration * latest YTM * VaR (change in Yield)
Can someone please help me understand if this is incorrect? I know there are lot of issues with using YTM and not a cash flow mapping and also not even bootstrapping but is the general principal correct?