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Interest rate risk estimation : a new duration-based approach

Bajo, Emanuele and Barbi, Massimiliano and Hillier, David (2013) Interest rate risk estimation : a new duration-based approach. Applied Economics, 45 (19). pp. 2697-2704. ISSN 0003-6846

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Abstract

Duration is widely used by fixed income managers to proxy the interest rate risk of their assets and liabilities. However, it is well known that the convexity of the price-yield relationship introduces approximation errors that grow with changes in yield. In this article we suggest a new approach, 'discrete duration', which significantly improves upon the accuracy of traditional duration methods and achieves a level of accuracy close to the more complex 'duration-plus-convexity' measure. In particular, discrete duration performs particularly well for long dated and low coupon rate bonds where the estimation error is impressively close to zero.

Item type: Article
ID code: 44267
Keywords: interest rate risk, duration, hedging, fixed income, Accounting, Economics and Econometrics
Subjects: Social Sciences > Commerce > Accounting
Department: Strathclyde Business School > Accounting and Finance
Depositing user: Pure Administrator
Date deposited: 02 Jul 2013 10:57
Last modified: 03 Jan 2019 13:47
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URI: https://strathprints.strath.ac.uk/id/eprint/44267
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