Mastering Attribution in Finance

8

Pricing, risk and the attribution equation

8.1 Introduction

8.2 Pricing securities from first principles

8.3 Calculating return using the perturbational equation

8.4 Residuals

8.5 Stand-alone portfolios

8.1 INTRODUCTION

A central requirement for fixed income attribution is the ability to translate changes in market risks into return.

Since the majority of securities can be priced using explicit formulae, one might think that this would be a straightforward task. In fact, the process can be fraught with difficulty. This chapter covers some of the more effective and widely used techniques for calculating attribution returns.

8.2 PRICING SECURITIES FROM FIRST PRINCIPLES

The fundamental way to price a security is to calculate its individual ...