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Single‐Factor Duration Models: Canadian Tests

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  • G. O. Bierwag
  • Gordon S. Roberts

Abstract

Single‐factor duration models of bond returns are derived from an underlying stochastic process of the term structure of interest rates. It is shown that beta in these models is a function of the parameters of the stochastic process and of implied measures of duration. Using unsmoothed Canadian monthly prices on default‐free government bonds, the single‐factor duration model is found to perform well from 1963 to 1986, but the hypothesis of stationarity of the duration‐based bond returns model for the period cannot be accepted. Some of the underlying stochastic processes imply stationary models and some of them imply nonstationary bond return models. The models of this paper open the door to a variety of linear bond return models having a strong theoretical support based on a theory of the stochastic motion of the term structure.

Suggested Citation

  • G. O. Bierwag & Gordon S. Roberts, 1990. "Single‐Factor Duration Models: Canadian Tests," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(1), pages 23-38, March.
    • Handle: RePEc:bla:jfnres:v:13:y:1990:i:1:p:23-38
    DOI: 10.1111/j.1475-6803.1990.tb00533.x
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    Cited by:

    1. Luis Manuel Fernandes Rego & Jose António Filipe, 2012. "Interest Rate Risk Immunization - The Impact Of Credit Risk In The Quality Of Immunization Case Study: Immunization With Portuguese Bonds And German Bonds," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 2(4), pages 308-308.

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