Evidence on Theta and Convexity in Treasury Returns

Kang, Joseph; Chen, Andrew H.

doi:10.3905/jfi.2002.319317

Cited by 7 publications

(2 citation statements)

References 7 publications

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“…Other interesting research in the field of bonds behavior, their risks and valuation is made by Kang and Chen (2002) or Křepelová and Jablonský (2013). They carried out studies on the development of prices in the bond market in the medium-and long-term periods, which are linked to the specificity of these particular periods of time.…”

Section: Literature Reviewmentioning

confidence: 99%

Improving the Quantification of Interest Rate Risk

Stádník

2022

International Scientific Conference „Business and Management“

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The value of Macaulay duration, probably the most widely used quantification method for measuring interest rate sensitivity of bonds, could roughly be financially interpreted as a percentage change of the bond price if the paral-lel shift of the interest rate equals 1 percentage point along the entire zero-coupon curve and the initial bond price is equal to 100%. The main problem of its practical application lies in the fact that parallel curve shift is a very rare case, and we are more often concerned with predicting short-term rate shifts and considering their consequences for the rest of the yield curve and thus also for bonds with longer maturities. Therefore, it is useful to find a certain value that represents a quantification of the impact of short rate shifts on bond prices with respect to the parameters of bonds. So, the main contribution of this financial engineering research is to design a measure that can be used in the same way as Macaulay duration, but as a response to the change of the short interest rate, for example: in the equation for chang-ing ΔP of a bond, in the equation of the volatility ratio of two bonds, or in the equation for bond portfolio sensitivity. Such a measure is still lacking in finance. We refer to this measure as the “short rate-shift duration”. Since the effect of the short rate shift on the entire yield curve, and thus especially on the price of long-term bonds, is very difficult to predict analytically, we use empirical data to calculate the duration value of the short-term shift and also to calculate its values for the USD and EUR interest markets.

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Section: Literature Reviewmentioning

confidence: 99%

Improving the Quantification of Interest Rate Risk

Stádník

2022

International Scientific Conference „Business and Management“

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“…In this text, we restrict our analysis to volatility patterns of a clean price of a typical fixed coupon rate bond without any embedded option (denoted as "bond" thereafter) with respect to the level of interest rates in the economy. 1 This study belongs to a strand in the financial literature focussed on bonds behaviour such as Fabozzi (1993Fabozzi ( , 1995Fabozzi ( , 2010; Smit, Swart (2006); Málek, Radová, Štěrba (2007), bonds volatility (Litterman, Scheinkman, Weiss 1991), volatility of bonds' determinants (Fuller, Settle 1984), bond market price development over medium-run and long-run periods (Chance, Jordan 1966;Kang, Chen 2002;Tvaronavičienė, Michailova 2006;Křepelová, Jablonský 2013) or behaviour of a bond portfolio (Dzikevičius, Vetrov 2013).…”

Section: Introductionmentioning

confidence: 99%

Volatility Strangeness of Bonds - How to Define and What Does it Bring?

Stádník¹,

Žďárek²

2017

Prague Economic Papers

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The aim of this article is to complement the existing economic and financial strand of the literature by defining three alternative regimes of the clean price volatility of a bond with respect to the level of interest rates in the economy. The suggested method takes into account responses to the changing nature of financial markets and allows for the possibility of observing negative interest rates. Our approach enables to find particular values of switching points between alternative regimes. After showing main theoretical steps, an investigation of the dependence of such points on key parameters of bonds is provided. An empirical illustration follows, accompanied by a discussion of theoretical and practical effects of this bond property. This approach offers both theorists and interested practitioners a way of overcoming difficulties associated with computations because of the complicated theoretical background. The results can be generalised, so that they apply both to the life of a bond and to the behaviour of a portfolio of bonds at a point of time.

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Do Convential Duratios Work in Practice?

Stádník¹

2019

International Scientific Conference ERAZ - Knowledge Based Sustainable Development

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The Macaulay Duration could be roughly interpreted as the percentage change of a bond price if the shift of interest rate equals 1% along the whole zero-coupon curve; which is empirically very rare case. To deal with the prediction of short-term rates shifts and its consequences for the whole yield curve is more often praxis, thus it is useful to define a certain value which respects this fact and which is handled in the same way as Macaulay Duration. We name this measure as "Short Rate Shift Duration" and the main contribution of this study is to suggest a procedure which allows to find its values.

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Evidence on Theta and Convexity in Treasury Returns

Cited by 7 publications

References 7 publications

Improving the Quantification of Interest Rate Risk

Improving the Quantification of Interest Rate Risk

Volatility Strangeness of Bonds - How to Define and What Does it Bring?

Do Convential Duratios Work in Practice?

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