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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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.
| Author(s): | Bajo, Emanuele, Barbi, Massimiliano and Hillier, David | 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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