Utilising Duration to Mitigate Interest Rate Risk in Bond Portfolio Management: A Quantitative Approach

Wenyi Yan ()
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Wenyi Yan: Shandong University of Finance and Economics, Finance

A chapter in Proceedings of the 2024 4th International Conference on Enterprise Management and Economic Development (ICEMED 2024), 2024, pp 95-103 from Springer

Abstract: Abstract In the current complex and ever-changing financial market environment, investors face the potential impact of interest rate fluctuations on the value of their investment portfolios. The duration of bonds plays a crucial role in measuring the sensitivity of bond prices to changes in interest rates. To effectively manage this risk, this paper aims to explore an additive calculation method based on bond duration to guide investors in bond portfolio allocation, thus mitigating interest rate risk. Firstly, the characteristics of bonds as the preferred investment choice for most investors and the associated interest rate risk are introduced. Secondly, the research objective of utilising the additivity of bond duration to mitigate interest rate risk is proposed. This paper employs four model methods: discounted cash flow method, Macaulay duration, weighted average duration of a portfolio, and utilisation of duration to reduce interest risk. Based on the principle of additivity of bond duration, the optimal bond portfolio proportions are calculated by weighted averaging the durations of various bonds, thus achieving the avoidance of interest rate risk. Finally, through empirical analysis involving the selection of two bonds, the effectiveness and feasibility of this method in practical investment are validated. This study presents a novel approach for portfolio allocation utilising bond duration, which enhances both the returns and stability of investment portfolios.

Keywords: Investment decision making; Bound; Macaulay duration; Interest rate risk (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-506-5_12

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DOI: 10.2991/978-94-6463-506-5_12

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