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Duration and Risk

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Abstract

Duration has long been used as a means of managing the risk of bond portfolios. It has also been extended to the analysis of equities. Although it is often been compared with the half-life of an asset it is more correct to consider duration as the approximate percentage change in price for each one-percent change in yield. Given this view it will be seen that the volatility of an asset and its duration are closely related. This paper uses the duration of a conventional valuation model to estimate both the volatility and total risk of the each sector of the UK commercial property market relative to the property market as a whole. The approach has potential value in estimating the risk of a new property where historic time series information is either limited on not available. In addition, by drawing a distinction between ex-post and ex-ante measures of risk the paper also estimates the inflation flow through rate for different lease structures.

Suggested Citation

  • Gerald R. Brown, 2000. "Duration and Risk," Journal of Real Estate Research, American Real Estate Society, vol. 20(3), pages 337-356.
    • Handle: RePEc:jre:issued:v:20:n:3:2000:p:337-356
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    References listed on IDEAS

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    1. Boquist, John A & Racette, George A & Schlarbaum, Gary G, 1975. "Duration and Risk Assessment for Bonds and Common Stocks," Journal of Finance, American Finance Association, vol. 30(5), pages 1360-1365, December.
    2. Livingston, Miles, 1978. "Duration and Risk Assessment for Bonds and Common Stocks: A Note," Journal of Finance, American Finance Association, vol. 33(1), pages 293-295, March.
    3. Lanstein, Ronald & Sharpe, William F., 1978. "Duration and Security Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(4), pages 653-668, November.
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    Cited by:

    1. Michael Heinrich & Thomas Schreck, 2018. "The Interest Rate Sensitivity of Institutional Real Estate Investments," LARES lares_2018_paper_112-hein, Latin American Real Estate Society (LARES).
    2. Groh, Alexander P., 2004. "Risikoadjustierte Performance von Private Equity-Investitionen," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 21382, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Alexius, Annika, 2004. "Far Out on the Yield Curve," Working Paper Series 2004:12, Uppsala University, Department of Economics.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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