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Lower-grade municipal bond price risk and sensitivity of price volatility to level of yields

Author

Listed:
  • Lakshmivarahan, S.
  • Stock, Duane R.

Abstract

Price volatility (variance) is a common measure of bond risk. Previous analysis has shown price volatility to depend upon duration and the volatility of interest rates. A more complete and accurate second-order model shows that price volatility also depends on predicted changes in yield and convexity. Municipal bond price volatility estimated by the more accurate second-order model can be much larger (200 per cent) than estimated first-order volatility. Analysts using only a first-order model can make large errors. Additionally, the effect of yield level on price volatility can be very different in first and second-order models.

Suggested Citation

  • Lakshmivarahan, S. & Stock, Duane R., 2008. "Lower-grade municipal bond price risk and sensitivity of price volatility to level of yields," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 1(3), pages 320-336, June.
    • Handle: RePEc:aza:rmfi00:y:2008:v:1:i:3:p:320-336
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    More about this item

    Keywords

    volatility; bonds; risk; predictability; ARMA; GARCH; TVPL; municipal;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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