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Exponential Duration: A More Accurate Estimation Of Interest Rate Risk

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  • Miles Livingston
  • Lei Zhou

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.

Suggested Citation

  • Miles Livingston & Lei Zhou, 2005. "Exponential Duration: A More Accurate Estimation Of Interest Rate Risk," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(3), pages 343-361, September.
    • Handle: RePEc:bla:jfnres:v:28:y:2005:i:3:p:343-361
    DOI: 10.1111/j.1475-6803.2005.00128.x
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    References listed on IDEAS

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    1. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, March.
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    Cited by:

    1. Zhongliang Tuo, 2013. "Hedging Against the Interest-rate Risk by Measuring the Yield-curve Movement," Papers 1312.6841, arXiv.org.
    2. Dierkes, Thomas & Ortmann, Karl Michael, 2015. "On the efficient utilisation of duration," Insurance: Mathematics and Economics, Elsevier, vol. 60(C), pages 29-37.
    3. Olga Em & Georgi Georgiev & Sergey Radukanov & Mariana Petrova, 2022. "Assessing the Market Risk on the Government Debt of Kazakhstan and Bulgaria in Conditions of Turbulence," Risks, MDPI, vol. 10(5), pages 1-18, April.
    4. Adler, Martin & Camba-Méndez, Gonzalo & Džaja, Tomislav & Manzanares, Andrés & Metra, Matteo & Vocalelli, Giorgio, 2023. "The valuation haircuts applied to eligible marketable assets for ECB credit operations," Occasional Paper Series 312, European Central Bank.

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