Risk management with duration analysis

Outlines the development of duration as a risk management tool for fixed income securities, shows how it is calculated and gives examples to illustrate its use in assessing risk exposure and immunizing bond portfolio returns against interest rate risk. Cites research confirming its effectiveness and goes on to discuss the application of duration gaps to balance sheet hedging (macrohedging) by financial institutions and the New Zealand government. Considers some complications of duration analysis due to convexity, stochastic process risk and default risk.

[1]  D. Heath,et al.  Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation , 1990, Journal of Financial and Quantitative Analysis.

[2]  J. Hicks,et al.  Value and Capital , 2017 .

[3]  Lawrence Fisher,et al.  Coping with the Risk of Interest-Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies , 1971 .

[4]  G. O. Bierwag.  Duration Analysis: Managing Interest Rate Risk , 1987 .

[5]  Frank S. Skinner,et al.  Duration for Bonds with Default Risk , 1997 .

[6]  G. Kaufman,et al.  Single Factor Duration Models in a Discrete General Equilibrium Framework , 1982 .

[7]  Iraj Fooladi,et al.  Bond portfolio immunization: Canadian tests , 1992 .

[8]  Sang Bin Lee,et al.  Term Structure Movements and Pricing Interest Rate Contingent Claims , 1986 .

[9]  G. Kaufman,et al.  BOND PORTFOLIO IMMUNIZATION: TESTS OF MATURITY, ONE‐ AND TWO‐FACTOR DURATION MATCHING STRATEGIES , 1987 .

[10]  Stephen A. Ross,et al.  Duration and the Measurement of Basis Risk , 1979 .

[11]  G. Kaufman,et al.  The art of risk management in bond portfolios* , 1981 .

[12]  F. Redington,et al.  Review of the Principles of Life-office Valuations , 1952 .

[13]  Roman L. Weil,et al.  Duration Forty Years Later , 1978 .

[14]  G. O. Bierwag.  BOND RETURNS, DISCRETE STOCHASTIC PROCESSES, AND DURATION , 1987 .

[15]  Oldrich A. Vasicek.  An equilibrium characterization of the term structure , 1977 .

[16]  Robert A. Jarrow,et al.  Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation , 1990 .

[17]  Alan G. White,et al.  Pricing Interest-Rate-Derivative Securities , 1990 .

[18]  Iraj Fooladi,et al.  Designing an Immunized Portfolio: Is M-Squared the Key? , 1993 .

[19]  F. Black,et al.  A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options , 1990 .

[20]  G. Kaufman,et al.  Immunization Strategies for Funding Multiple Liabilities , 1983, Journal of Financial and Quantitative Analysis.

[21]  Frederick Robertson Macaulay,et al.  Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856. , 1938 .

[22]  G. Kaufman,et al.  Durations of Non-Default-Free Securities , 1988 .

[23]  S. Ross,et al.  A theory of the term structure of interest rates'', Econometrica 53, 385-407 , 1985 .

[24]  G. O. Bierwag,et al.  Single‐Factor Duration Models: Canadian Tests , 1990 .