Title: Properties of duration drift

Authors: Juho Kanniainen, Keijo Ruohonen

Addresses: Department of Industrial Management, Tampere University of Technology, P.O. Box 541, Tampere FI-33101, Finland. ' Department of Mathematics, Tampere University of Technology, P.O. Box 553, Tampere FI-33101, Finland

Abstract: Duration requires active monitoring because it is sensitive to the yield, resulting in duration drift. Duration drift determines the portfolio|s exposure to rate changes, and hence it can be used as a measure of immunisation risk. However, research has barely focused on the properties of duration drift. This study demonstrates how the structure of cash flows affects duration and its drift, how duration drift itself responds to a change in the yield and what conditions affect the stability or reactivity of duration. With these results, we discuss the conditions under which the immunisation strategy must be guarded against reactive duration and high immunisation risk.

Keywords: duration drift; immunisation risk; risk management; yield sensitivity; portfolio exposure; rate changes; cash flows; yield changes; duration stability; duration reactivity; reactive duration; economics; business research.

DOI: 10.1504/IJEBR.2011.038794

International Journal of Economics and Business Research, 2011 Vol.3 No.2, pp.176 - 191

Published online: 18 Apr 2015 *

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