IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v28y2005i3p343-361.html

Exponential Duration: A More Accurate Estimation Of Interest Rate Risk

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-6803.2005.00128.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-6803.2005.00128.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    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, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Zhongliang Tuo, 2013. "Hedging Against the Interest-rate Risk by Measuring the Yield-curve Movement," Papers 1312.6841, arXiv.org.
    3. Dierkes, Thomas & Ortmann, Karl Michael, 2015. "On the efficient utilisation of duration," Insurance: Mathematics and Economics, Elsevier, vol. 60(C), pages 29-37.
    4. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marc Flandreau & Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities," Working Papers 0005, European Historical Economics Society (EHES).
    2. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    3. Tallman, Ellis W. & Moen, Jon R., 2012. "Liquidity creation without a central bank: Clearing house loan certificates in the banking panic of 1907," Journal of Financial Stability, Elsevier, vol. 8(4), pages 277-291.
    4. Patricia M. Dechow & Richard G. Sloan & Mark T. Soliman, 2004. "Implied Equity Duration: A New Measure of Equity Risk," Review of Accounting Studies, Springer, vol. 9(2), pages 197-228, June.
    5. John Caks & William R. Lane & Robert W. Greenleaf & Reginald G. Joules, 1985. "A Simple Formula For Duration," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(3), pages 245-249, September.
    6. Mimir, Yasin & Sunel, Enes, 2025. "Fear (no more) of floating: Asset purchases and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 177(C).
    7. David Schröder & Florian Esterer, 2016. "A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 857-900, August.
    8. Gollier, Christian, 2016. "Gamma discounters are short-termist," Journal of Public Economics, Elsevier, vol. 142(C), pages 83-90.
    9. Steven Russell, 1993. "Monetary policy experiments in a stochastic overlapping generations model of the term structure," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    10. Shiller, Robert J., 1982. "Consumption, asset markets and macroeconomic fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 203-238, January.
    11. Heck, Jean L. & Zivney, Terry L. & Modani, Naval K., 1995. "A simplified approach to measuring bond duration," Financial Services Review, Elsevier, vol. 4(1), pages 31-40.
    12. Ellis W. Tallman & Jon R. Moen, 2018. "The transmission of the financial crisis in 1907: an empirical investigation," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 12(2), pages 277-312, May.
    13. Galy, Michel, 1989. "Banks exposure to market risks," MPRA Paper 62304, University Library of Munich, Germany.
    14. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, vol. 81(1), pages 27-60, July.
    15. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    16. Peter Lewin & Nicolas Cachanosky, 2019. "Re-switching, the average period of production and the Austrian business-cycle theory: A comment on Fratini," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 32(4), pages 375-382, December.
    17. Gantenbein,, 2016. "Unternehmerisches Finanzmanagement – Meilensteine der Entwicklung," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 70(4), pages 387-406.
    18. Bordo, Michael D. & Haubrich, Joseph G., 2010. "Credit crises, money and contractions: An historical view," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 1-18, January.
    19. Körnert, Jan, 2006. "Liquidity and solvency problems during the banking crises of the National Banking Era," Wirtschaftswissenschaftliche Diskussionspapiere 05/2006, University of Greifswald, Faculty of Law and Economics.
    20. Francesco Ravazzolo & Joaquin L. Vespignani, 2015. "A new monthly indicator of global real economic activity," Globalization Institute Working Papers 244, Federal Reserve Bank of Dallas.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfnres:v:28:y:2005:i:3:p:343-361. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.