Duration Concepts, Analysis, and Applications

Zvika Afik, Iraj Fooladi, Gady Jacoby, Gordon Roberts

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

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.

Original languageEnglish
Title of host publicationEncyclopedia of Finance, Third Edition
PublisherSpringer International Publishing
Pages681-702
Number of pages22
ISBN (Electronic)9783030912314
ISBN (Print)9783030912307
DOIs
StatePublished - 1 Jan 2022
Externally publishedYes

Bibliographical note

Publisher Copyright:
© Springer Nature Switzerland AG 2022.

Keywords

  • Banks
  • Bond price volatility
  • Duration
  • Exchange rate, risk
  • Financial institution management
  • Fixed income securities
  • Hedging interest rate risk
  • Immunization
  • Insurance companies
  • Macrohedging
  • Pension funds
  • Stochastic process risk

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