The M-Vector Model: Derivation and Testing of Extensions to M-Square
15 Pages Posted: 12 Apr 2007
Date Written: January 1997
This article derives and tests a multiple-factor extension of the M-square model (see Fong and Vasicek  and Fong and Fabozzi ), termed as the M-vector model. Tests of the M-square model indicate that the model reduces the interest rate risk inherent in the traditional duration model by more than half. The M-vector model demonstrates near-perfect hedging performance, eliminating more than 95% of interest rate risk inherent in the traditional duration model.
Keywords: Interest Rate Risk, Duration, Convexity, M-Square, M-Vector, Duration Vector
JEL Classification: G1, G10, G11, G12
Suggested Citation: Suggested Citation