Skip to main content
SpringerLink
Log in

Duration analysis and its applications

  • Reference work entry
Encyclopedia of Finance

  • 6604 Accesses

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. The article goes on to examine stochastic process risk and duration extensions, which address it. We then 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.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 329.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  1. Acharya, V.V. and Carpenter, J.N. (2002). “Corporate bond valuation and hedging with stochastic interest rates and endogenous bankruptcy.” Review of Financial Studies, 15: 1355–1383.

    Article  Google Scholar 

  2. Bierwag, G.O. (1977). “Immunization, duration, and the term structure of interest rates.” Journal of Financial and Quantitative Analysis, 12, 5, 725–741.

    Article  Google Scholar 

  3. Bierwag, G.O. (1987a). Duration Analysis, Managing Interest Rate Risk. Cambridge, MA: Ballinger Publishing Company.

    Google Scholar 

  4. Bierwag, G.O. (1987b). “Bond returns, discrete stochastic processes, and duration.” Journal of Financial Research, 10(Autumn), 10, 3, 191–209.

    Google Scholar 

  5. Bierwag, G.O. (1997). Duration Analysis: A Historical Perspective Document. School of Business, Miami International University, 12,5, 725–741.

    Google Scholar 

  6. Bierwag, G.O. and Kaufman, G.G. (1977). “Coping with the risk of interest-rate fluctuations: a note.” Journal of Business 50(3): 364–370.

    Article  Google Scholar 

  7. Bierwag, G.O. and Kaufman, G.G. (1988). “Duration of non-default free securities.” Financial Analysts Journal, 44(4):39–46; published as a monograph to members of the Institute of Chartered Financial Analysis.

    Article  Google Scholar 

  8. Bierwag, G.O. and Kaufman, G.G. (1996). “Managing interest rate risk with duration gaps to achieve multiple targets.” Journal of Financial Engineering, March, 5, 53–7

    Google Scholar 

  9. Bierwag, G.O. and Khang, C. (1979). “An immunization strategy is a maximin strategy.” Journal of Finance, May: 389–399.

    Google Scholar 

  10. Bierwag, G.O. and Roberts, G.S. (1990). “Single factor duration models: Canadian tests.” Journal of Financial Research, 13: 23–38.

    Google Scholar 

  11. Bierwag, G.O., Kaufman, G.G., Schweitzer, R., and Toevs, A. (1981). “The art of risk management in bond portfolios.” Journal of Portfolio Management, 7: 27–36.

    Article  Google Scholar 

  12. Bierwag, G.O., Kaufman, G.G., and Toevs, A. (1982a). “Single factor duration models in a discrete general equilibrium framework.” The Journal of Finance, 37: 325–338.

    Article  Google Scholar 

  13. Bierwag, G.O., Kaufman, G.G., and Toevs, A. (1982b). “Empirical tests of alternative single factor duration models.” Paper presented at Western Finance Association, Portland, Oregon (June).

    Google Scholar 

  14. Bierwag, G.O., Kaufman, G.G., and Toevs, A. (1983). “Immunization strategies for funding multiple liabilities.” Journal of Financial and Quantitative Analysis, 18: 113–124.

    Article  Google Scholar 

  15. Bierwag, G.O., Kaufman, G.G., and Latta, C. (1987). “Bond portfolio immunization: tests of maturity, one-and two-factor duration matching strategies.” Financial Review, 22,2, 203–219.

    Article  Google Scholar 

  16. Bierwag, G.O., Fooladi, I., and Roberts, G. (1993). “Designing and immunization portfolio: is Msquared the key?” Journal of Banking and Finance, 17: 1147–1170.

    Article  Google Scholar 

  17. Brennan, M.J. and Schwartz, E.S. (1983). “Duration, bond pricing, and portfolio management, in innovations in bond portfolio management, duration analysis and immunization,” in G.G. Kaufman, G.O. Bierwag, and A. Toevs (eds.) Proceedings from the Ashland Conference, 1981. Greenwich, Conn.: Jai Press.

    Google Scholar 

  18. Bodie, Z. (1996). “What the pension benefit guarantee corporation can learn from the federal savings and loan insurance corporation.” Journal of Financial Services Research, 10 (March): 83–100.

    Article  Google Scholar 

  19. Chambers, D.R., Carleton, W.T., and McEnally, R.W. (1988). “Immunizing default-free bond portfolios with a duration vector.” Journal of Financial and Quantitative Analysis, 23(1): 89–104.

    Article  Google Scholar 

  20. Chance, D.M. (1990). “Default risk and the duration of zero coupon bonds.” Journal of Finance, 45(1): 265–274.

    Article  Google Scholar 

  21. Falloon, W. (1993). “Southern exposure.” Risk 6 (September): 103–107.

    Google Scholar 

  22. Fisher, L. and Weil, R.L. (1971). “Coping with the risk of market-rate fluctuations: returns to bondholders from naive and optimal strategies.” Journal of Business (October): 408-431.

    Google Scholar 

  23. Flannery, M.J. and James, C.M. (1984). “The effect of interest rate changes on the common stock returns of financial institutions.” The Journal of Finance, 39: 1141–1153.

    Article  Google Scholar 

  24. Fong, H.G. and Vasicek, O. (1983). “Return maximization for immunized portfolios, in innovations in bond portfolio management, duration analysis and immunization,” in G.G. Kaufman, G.O. Bierwag, and A. Toevs (eds.) The Ashland Conference, 1981. Greenwich, CT: Jai Press.

    Google Scholar 

  25. Fong, H.G. and Vasicek, O.A. (1984). “A risk minimizing strategy for portfolio immunization.” Journal of Finance, 34 (December): 1541–1546.

    Article  Google Scholar 

  26. Fooladi, I. and Roberts, G. (1992). “Portfolio immunization: Canadian tests.” Journal of Economics and Business, 44(1): 3–17.

    Article  Google Scholar 

  27. Fooladi, I. and Roberts, G. (2004). “Macrohedging for financial institutions: beyond duration.” Journal of Applied Finance, 14(1): 11–19.

    Google Scholar 

  28. Fooladi, I., Roberts, G., and Skinner, F. (1997). “Duration for bonds with default risk.” Journal of Banking and Finance, 21(1): 1–16.

    Google Scholar 

  29. Hicks, J.R. (1939). Value and Capital, 2nd edn, 1946. Oxford: Clarendon Press.

    Google Scholar 

  30. Hopewell, M.H. and Kaufman, G.G. (1973). “Bond price volatility and term to maturity: a generalized respecification.” American Economic Review, September: 749–753.

    Google Scholar 

  31. Ingersoll, J.E., Skelton, J., and Weil, R.L. (1978). “Duration forty years later.” Journal of Financial and Quantitative Analysis, November: 621–650.

    Google Scholar 

  32. Jacoby, G. (2003). “A duration model for defaultable bonds.” Journal of Financial Research, 26: 129–146.

    Article  Google Scholar 

  33. Jacoby, G. and Roberts, G. (2003). “Default-and call-adjusted duration for corporate bonds.” Journal of Banking and Finance, 27: 2297–2321.

    Article  Google Scholar 

  34. Kaufman, G.G. (1984). “Measuring and managing interest rate risk: a primer,” in Economic Perspective. Federal Reserve Bank of Chicago (8): 16–29.

    Google Scholar 

  35. Leibowitz, M.L. and Weinberger, A. (1981). “The uses of contingent immunization.” Journal of Portfolio Management (Fall): 51-55.

    Google Scholar 

  36. Leibowitz, M.L. and Weinberger, A. (1982). “Contingent immunization, Part I: Risk control procedures.” Financial Analysts Journal (November-December): 17–32.

    Google Scholar 

  37. Leibowitz, M.L. and Weinberger, A. (1983). “Contingent immunization, Part II: Problem areas.” Financial Analysts Journal (January-February): 35-50.

    Google Scholar 

  38. Macaulay, F.R. (1938). “Some theoretical problems suggested by the movement of interest rates, bonds, yields, and stock prices in the United States since 1856.” National Bureau of Economic Research, New York, Columbia University Press, pp. 44–53.

    Google Scholar 

  39. Merton, R.C. (1974). “On the pricing of corporate debt: the risk structure of interest rates.” Journal of Finance, 29: 449–470.

    Google Scholar 

  40. Morgan, J.P. (1994). Introduction to Riskmetrics. New York: J.P. Morgan.

    Google Scholar 

  41. Nawalkha, S.K. and Chambers, D.R. (1997). “The M-vector model: Derivation and testing of extensions to M-square.” Journal of Portfolio Management, 23(2): 92–98.

    Article  Google Scholar 

  42. Prisman, E. (1986). “Immunization as a MaxMin strategy: a new look.” Journal of Banking and Finance, 10(December): 493–504.

    Google Scholar 

  43. Prisman, E.Z. and Shores, M.R. (1988). “Duration measures for specific term structure estimations and applications to bond portfolio immunization.” Journal of Banking and Finance, 12(3): 493–504.

    Article  Google Scholar 

  44. Redington, F.M. (1952). “Review of the principle of Life-Office Valuations.” Journal of the Institute of Actuaries, 78: 286–340.

    Google Scholar 

  45. Samuelson, P.A. (1945). “The effects of interest rate increases on the banking system.” American Economic Review (March): 16–27.

    Google Scholar 

  46. Saunders, A. (2000). Financial Institutions Management, 3rd edn. Boston: Irwin McGraw Hill, Chapters 8, 9 and 18.

    Google Scholar 

  47. Soto, G.G. (2001). “Immunization derived from a polynomial duration vector in the Spanish bond market.” Journal of Banking and Finance, 25: 1037–1057.

    Article  Google Scholar 

  48. Zion, D. and Carache, B. (2002). The Magic of Pension Accounting. Boston: Credit Suisse First.

    Google Scholar 

Download references

Acknowledgement

The authors gratefully acknowledge the support of the Social Sciences and Humanities Research Council of Canada. Iraj Fooladi also acknowledges support from Douglas C. Mackay Fund at Dalhousie. Iraj Fooladi also acknowledges support from Douglas C. Mackay Fund at Dalhousie.

Author information

Authors and Affiliations

  1. Dalhousie University, Halifax, Canada

    Iraj J. Fooladi

  2. University of Manitoba, Winnipeg, Canada

    Gady Jacoby

  3. York University, Toronto, Canada

    Gordon S. Roberts

Authors
  1. Iraj J. Fooladi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Gady Jacoby
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Gordon S. Roberts
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Rutgers University, New Brunswick/Piscataway, USA

    Cheng-Few Lee

  2. San Francisco State University, San Francisco, USA

    Alice C. Lee

Rights and permissions

Reprints and permissions

Copyright information

© 2006 Springer Science+Business Media, Inc.

About this entry

Cite this entry

Fooladi, I.J., Jacoby, G., Roberts, G.S. (2006). Duration analysis and its applications. In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-26336-6_39

Download citation

  • DOI: https://doi.org/10.1007/978-0-387-26336-6_39

  • Publisher Name: Springer, Boston, MA

  • Print ISBN: 978-0-387-26284-0

  • Online ISBN: 978-0-387-26336-6

  • eBook Packages: Business and Economics

Publish with us

Policies and ethics

Search

Navigation