A Highly Accurate Measure of Bond Price Sensitivity to Interest Rates
36 Pages Posted: 7 Feb 2003
Date Written: January 2003
Abstract
This paper develops a new method to estimate bond price changes in response to changes in interest rates. This method is always more accurate than traditional estimation with modified duration. The price estimates by this new method are very close to price estimates using traditional duration plus convexity when interest rates decrease. If interest rates rise, bond investors will suffer larger price declines than predicted by traditional duration plus convexity. The new estimate avoids this undesirable price overestimation for rising interest rates, and provides an estimate slightly below the true price. For risk averse investors, overestimation of price declines (with the new method) is always better than underestimation of price declines (with traditional duration plus convexity).
Keywords: duration, interest rate, interest rate risk, price estimation, convexity
JEL Classification: G110, G120
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The M-Vector Model: Derivation and Testing of Extensions to M-Square
-
By Nelson Lacey and Sanjay K. Nawalkha
-
The Duration Vector: a Continuous-Time Extension to Default-Free Interest Rate Contingent Claims
-
Generalized M-Vector Models for Hedging Interest Rate Risk
By Sanjay K. Nawalkha, Gloria M. Soto, ...
-
Riding the Yield Curve: Reprise
By Robin Grieves and Alan J. Marcus
-
A New Measure of Cross-Sectional Risk and its Empirical Implications for Portfolio Risk Management
-
Managing Interest Rate Risk: The Next Challenge?
By Sanjay K. Nawalkha and Gloria M. Soto