A Guide to Fixed Income Portfolio Management Using Risk Duration, Reward Duration, and Duration Ratio as Alternatives to Effective Duration and Convexity

31 Pages Posted: 25 Oct 2007

See all articles by Mike Allen

Mike Allen

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2007

Abstract

1) Macaulay's duration (a.k.a. duration) and modified duration are not effective risk management measurements on callable or pre-payable bonds. They are fine on non-callable and non-pre-payable bonds. 2) Effective duration is useful on callable and pre-payable bonds, HOWEVER, it is useless by itself. Convexity MUST be combined with effective duration in order to be of value in fixed income risk management. 3) Effective duration and convexity combined, though technically accurate, are very difficult to interpret and apply in fixed income interest rate risk management. 4) Alternatives to effective duration and convexity that offer the same valuable risk management information, but in a much simpler, intuitive and usable form are Risk Duration, Reward Duration, and Duration Ratio. 5) Risk Duration and Duration Ratio are the two most powerful statistics available to today's fixed income portfolio and risk managers.

Keywords: Risk Duration, Reward Duration, Duration Ratio, Macaulay duration, modified duration, duration, convexity, Allen's convexity, quality ratio, fixed income portfolio management, bond management, risk management

Suggested Citation

Allen, Mike, A Guide to Fixed Income Portfolio Management Using Risk Duration, Reward Duration, and Duration Ratio as Alternatives to Effective Duration and Convexity (October 1, 2007). Available at SSRN: https://ssrn.com/abstract=1024296 or http://dx.doi.org/10.2139/ssrn.1024296

Mike Allen (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Register to save articles to
your library

Register

Paper statistics

Downloads
1,228
Abstract Views
3,951
rank
6,363
PlumX Metrics