Measuring Interest Rate Risk Using a Duration Vector

21 Pages Posted: 22 Mar 2017  

Manfred Jaeger-Ambrozewicz

Hochschule für Technik und Wirtschaft Berlin

Date Written: March 4, 2017

Abstract

The duration of a bond approximately measures the interest rate risk caused by parallel shifts of the yield curve. This paper uses a generalization of the duration suggested by Diebold at al. (2006) that takes the variations of the level, the slope and the curvature of the yield curve into account. As the dynamics of the yield curve are well approximated using these three factors we obtain a reasonable risk assessment. Compared with other approaches that take non-parallel shifts into account the approach considered here is very intuitive as it is similar to the classical duration. A case study exemplifies that in addition to the level the risk factors slope and curvature matter. Actually, we find a risk reducing effect due to the positive correlation between the innovations to level respectively slope.

Keywords: Duration, duration vector, Interest Rate Risk

JEL Classification: B26, E43, G12

Suggested Citation

Jaeger-Ambrozewicz, Manfred, Measuring Interest Rate Risk Using a Duration Vector (March 4, 2017). Available at SSRN: https://ssrn.com/abstract=2938087

Manfred Jaeger-Ambrozewicz (Contact Author)

Hochschule für Technik und Wirtschaft Berlin ( email )

Treskowallee 8
Berlin, 10313
Germany

HOME PAGE: http://www.mathfred.de

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