Duration Concepts, Analysis, and Applications

Zvika Afik (), Iraj Fooladi (), Gady Jacoby () and Gordon Roberts
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Zvika Afik: Hadassah Academic College
Iraj Fooladi: Dalhousie University
Gady Jacoby: The University of Manitoba

Chapter 14 in Encyclopedia of Finance, 2022, pp 681-702 from Springer

Abstract: Abstract We discuss duration and its development, placing particular emphasis on various applications. The survey begins by introducing duration and showing how traders and portfolio managers use this measure in speculative and hedging strategies. We then turn to convexity, a complication arising from relaxing the linearity assumption in duration. Next, we present immunization – a hedging strategy based on duration – and then examine stochastic process risk, foreign-exchange risk, and duration extensions that address these risks. We also examine the track record of duration and how the measure applies to financial futures. The discussion then turns to macrohedging the entire balance sheet of a financial institution. We develop a theoretical framework for duration gaps and apply it, in turn, to banks, life insurance companies, and defined benefit pension plans.

Keywords: Duration; Fixed income securities; Immunization; Hedging interest rate risk; Macrohedging; Bond price volatility; Stochastic process risk; Exchange rate risk; Financial institution management; Pension funds; Insurance companies; Banks (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_14

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DOI: 10.1007/978-3-030-91231-4_14

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