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Volatility Strangeness of Bonds - How to Define and What Does it Bring?

Bohumil Stádník and Václav Žďárek

Prague Economic Papers, 2017, vol. 2017, issue 5, 602-629

Abstract: The aim of this article is to complement the existing economic and financial strand of the literature by defining three alternative regimes of the clean price volatility of a bond with respect to the level of interest rates in the economy. The suggested method takes into account responses to the changing nature of financial markets and allows for the possibility of observing negative interest rates. Our approach enables to find particular values of switching points between alternative regimes. After showing main theoretical steps, an investigation of the dependence of such points on key parameters of bonds is provided. An empirical illustration follows, accompanied by a discussion of theoretical and practical effects of this bond property. This approach offers both theorists and interested practitioners a way of overcoming difficulties associated with computations because of the complicated theoretical background. The results can be generalised, so that they apply both to the life of a bond and to the behaviour of a portfolio of bonds at a point of time.

Keywords: bond /portfolio of bonds; volatility regimes; price/yield sensitivity; negative interest rates (search for similar items in EconPapers)
JEL-codes: G1 G10 G12 G14 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.18267/j.pep.636

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