A New Stochastic Duration Based on the Vasicek and CIR Term Structure Theories

Xueping Wu

Journal of Business Finance & Accounting, 2000, vol. 27, issue 7‐8, 911-932

Abstract: The stochastic duration based on the Vasicek and CIR models is theoretically superior to Macaulay’s duration. However, empirical tests on bond immunization performance have so far failed to show its superiority. Within the one‐factor framework, this paper proposes to use a longer zero‐curve yield instead of the original instantaneous interest rate as a proxy for the relevant risk source(s). We prove that the new duration becomes larger, increasing with bond maturity, than the original duration. Bond immunization using Belgian data shows that the new duration definitely beats the original duration and can in some cases outperform Macaulay’s duration.

Date: 2000
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