Exponential Duration: A More Accurate Estimation of Interest Rate Risk

Posted: 3 Aug 2004

See all articles by Miles Livingston

Miles Livingston

University of Florida - Department of Finance, Insurance and Real Estate

Lei Zhou

Northern Illinois University - Department of Finance

Abstract

We develop a new method to estimate the interest rate risk of an asset. This method is based on modified duration and is always more accurate than traditional estimation with modified duration. The estimates by this method are close to estimates using traditional duration plus convexity when interest rates decrease. If interest rates rise, investors will suffer larger value declines than predicted by traditional duration plus convexity estimate. The new method avoids this undesirable value overestimation, and provides an estimate slightly below the true value. For risk-averse investors, overestimation of value declines is more desirable and conservative.

Keywords: Duration, interest rate risk

JEL Classification: G10, G12

Suggested Citation

Livingston, Miles B. and Zhou, Lei, Exponential Duration: A More Accurate Estimation of Interest Rate Risk. Available at SSRN: https://ssrn.com/abstract=572181

Miles B. Livingston (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainsville, FL 32611-7168
United States
352-392-4316 (Phone)
352-392-0301 (Fax)

Lei Zhou

Northern Illinois University - Department of Finance ( email )

Wirtz Hall
DeKalb, IL 60115
United States
815-753-1115 (Phone)
815-753-0504 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,977
PlumX Metrics