Title: A new measure of price sensitivity to interest rate changes

Authors: Bohumil Stádník

Addresses: Department of Banking and Insurance, Faculty of Finance, Prague University of Economics and Business, W. Churchill Sq. 4, 140 00 Prague, Czech Republic

Abstract: Macaulay's duration is a quantification of the sensitivity of the bond price to a change of its yield to maturity (YTM). Its main imperfection is that the change of YTM is very difficult to predict. To predict it correctly we would have to correctly predict the change of the entire shape of the zero-coupon curve. As we believe that predicting a shift of its short rate is easier than predicting the way the entire yield curve will be reshaped, we decided to quantify the sensitivity of the bond price with respect to the change of the short rate. Thus, the methodology is based on empirical quantification of the reshaping of the whole zero-coupon curve with respect to the change of its short rate, and based on such a quantification, we may then calculate the change of the bond price. The proposed measure is referred to as 'short rate shift duration'.

Keywords: short rate shift duration; SRS duration; Macaulay's duration; interest rate sensitivity; zero-coupon yield curve reshaping; yield to maturity; YTM.

DOI: 10.1504/IJEBR.2025.145858

International Journal of Economics and Business Research, 2025 Vol.29 No.3/4/5, pp.264 - 284

Received: 29 Jul 2022
Accepted: 02 Jan 2023
Published online: 30 Apr 2025 *

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