Recently, the German government issued a long-dated bond with a 0% coupon.
I'm trying to implement a historical VaR model and would like to know the best way to model the historical returns of this bond.
What's tripping me up is the possibility that the return series could be "corrupted" due to:
a) the low level of rates
b) the possibility of having 0% in the denominator
Let's assume the returns are:
t_0 = 0% YTM
t_1 = 0.01% YTM
t_2 = 0.025% YTM
t_3 = 0% YTM
t_4 = -0.01% YTM
t_5 = 0% YTM
t_6 = 0.03% YTM
What's the best way to model these returns?