Duration and Convexity Measures When the Yield Curve Changes Shape

The Journal of Financial Engineering, Vol. 7, No. 1 (March 1998)

Posted: 22 Apr 1998

See all articles by Steven V. Mann

Steven V. Mann

University of South Carolina

Pradipkumar Ramanlal

University of Central Florida - College of Business Administration

Abstract

Duration and convexity are widely used interest-rate risk measures. Traditional formulations assume the yield curve is flat and movements are parallel. In contrast, we characterize changes in the yield curve's shape using three parameters (level, slope, and curvature) and permit changes in these parameters to be correlated. We then derive duration and convexity measures assuming realistic changes in the yield curve's shape. Our measures are compared to the traditional ones to illustrate the importance of changes in the yield curve's shape when measuring exposure to interest-rate risk.

JEL Classification: E43, G12

Suggested Citation

Mann, Steven V. and Ramanlal, Pradipkumar, Duration and Convexity Measures When the Yield Curve Changes Shape. The Journal of Financial Engineering, Vol. 7, No. 1 (March 1998), Available at SSRN: https://ssrn.com/abstract=77068

Steven V. Mann (Contact Author)

University of South Carolina ( email )

Francis M. Hipp Building
Darla Moore School of Business
Columbia, SC 29208
United States
803-777-4929 (Phone)
830-777-6876 (Fax)

Pradipkumar Ramanlal

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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