Lower-grade municipal bond price risk and sensitivity of price volatility to level of yields

S. Lakshmivarahan and Duane R. Stock

Journal of Risk Management in Financial Institutions, 2008, vol. 1, issue 3, 320-336

Abstract: Price volatility (variance) is a common measure of bond risk. Previous analysis has shown price volatility to depend upon duration and the volatility of interest rates. A more complete and accurate second-order model shows that price volatility also depends on predicted changes in yield and convexity. Municipal bond price volatility estimated by the more accurate second-order model can be much larger (200 per cent) than estimated first-order volatility. Analysts using only a first-order model can make large errors. Additionally, the effect of yield level on price volatility can be very different in first and second-order models.

Keywords: volatility; bonds; risk; predictability; ARMA; GARCH; TVPL; municipal (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2008:v:1:i:3:p:320-336

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