On the Interest Rate Sensitivity of Corporate Securities

52 Pages Posted: 12 Sep 2013 Last revised: 17 Oct 2018

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2018

Abstract

We use contingent claim asset pricing and exploit capital structure priority to better understand the relation between corporate security returns and interest rate changes. We show theoretically and confirm empirically that the interest rate sensitivity, or duration, of a security within a firm’s capital structure is monotonically related to the priority of the security. The magnitude of this effect of priority on duration depends on the firm’s market leverage. These findings at the firm level have important implications for interpreting the time-varying correlations between the returns on government bonds and those on aggregate stock and debt markets.

Suggested Citation

Choi, Jaewon and Richardson, Matthew P. and Whitelaw, Robert F., On the Interest Rate Sensitivity of Corporate Securities (October 7, 2018). Available at SSRN: https://ssrn.com/abstract=2324904 or http://dx.doi.org/10.2139/ssrn.2324904

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Matthew P. Richardson (Contact Author)

New York University (NYU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER)

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AQR Capital Management, LLC ( email )

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Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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