Interest Rate Risk of Zero-Coupon Bond Prices on Bombay Stock Exchange (BSE) –Empirical Test of the Duration, Modified Duration, Convexity and Immunization Risk

Australian Journal of Basic and Applied Sciences, 6(10): 166-179, 2012 ISSN 1991-8178

14 Pages Posted: 5 Sep 2019

See all articles by Hosein Asgari Alouj

Hosein Asgari Alouj

Islamic Azad University (IAU) - Bilesavar branch

Nahid Maleki Nia

Department of accounting and management, Bilesavar branch, Islamic Azad University, Bilesavar, Iran

Seyed Masoud Sajjadian Amiri

Osmania University (OU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

Duration and convexity are important measures in fixed-income portfolio management and help develop methodologies in interest rate risk management. This article presents empirical test of duration and convexity of Zero-Coupon Bonds( ZCBs )at BSE in order to determine sensitivity of ZCBs prices on interest rate changes. The sensitivity of ZCBs in BSE on interest rate changes is tested and determined that convexity is more accurate measure as approximation of ZCBs prices changes than duration. The empirical results provide evidence that first duration is an increasing function of the interest rate and next there is no relationship between convexity and interest rate. The estimated percentage changes in ZCBs price using duration decrease by raising the percentage change in interest rate and we have non-parallel shift in lines for different level of duration. By non-parallel shifting of duration downward, the percentage change using only duration decreases and indicates higher negative difference and hence higher sensitivity at higher duration levels. As the interest rate increases the percentage change in ZCBs price using duration and convexity increases and again we have non-parallel shift in lines for different level of duration. By non-parallel shifting of duration upward, the percentage change using both duration and convexity increases and indicates higher positive difference and hence higher sensitivity at higher duration levels and by non-parallel shifting of duration downward, the percentage change using both duration and convexity decreases and indicates higher negative value and hence higher sensitivity at shorter duration levels. Also it has tested empirically whether convexity is return enhancing or return diminishing. Results of empirical tests over time periods under consideration show ZCBs convexity to be either significantly or negatively related to ex ante ZCBs returns. Further, the magnitude of ZCBs convexity is shown to be related indirectly and significantly to the immunization risk inherent in a bond portfolio. The main goal of this study is to determine how non-linear estimation models fit in case of ZCBs that are traded on BSE and to verify whether they offer reliable results compared with linear regression model on BSE. Also the most relevant contribution of the paper is to obtain a better curve estimation during the time period of March, 2009 -June, 2012 for duration and convexity exposures that contribute to the marginal increment of the coefficient of determination and the construction of a best nonlinear regression model that overcomes the linearity models.

Keywords: duration, convexity, corporate bonds, interest rate risk

JEL Classification: G1, G12

Suggested Citation

Asgari Alouj, Hosein and Maleki Nia, Nahid and Amiri, Seyed Masoud Sajjadian, Interest Rate Risk of Zero-Coupon Bond Prices on Bombay Stock Exchange (BSE) –Empirical Test of the Duration, Modified Duration, Convexity and Immunization Risk (2012). Australian Journal of Basic and Applied Sciences, 6(10): 166-179, 2012 ISSN 1991-8178. Available at SSRN: https://ssrn.com/abstract=3443526

Hosein Asgari Alouj

Islamic Azad University (IAU) - Bilesavar branch

Iran

Nahid Maleki Nia (Contact Author)

Department of accounting and management, Bilesavar branch, Islamic Azad University, Bilesavar, Iran ( email )

Iran

Seyed Masoud Sajjadian Amiri

Osmania University (OU)

Tarnaka
Hyderabad, Andhra Pradesh 500 007
India

Register to save articles to
your library

Register

Paper statistics

Downloads
8
Abstract Views
56
PlumX Metrics