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

Abstract

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.

Improving the Quantification of Interest Rate Risk

“…Important works in the field of bonds volatility are and volatility of bonds' determinants (Fuller & Settle, 1984). Serious research in the area of volatility is also provided in Stádník (2012Stádník ( , 2014, Stádník and Žďárek (2017) (version for practical portfolio management) which belong to a strand in the financial literature focused on basic bonds behaviour such as Chance and Jordan (1966), , Fabozzi (1993Fabozzi ( , 1995Fabozzi ( , 2010 or Smit and Swart (2006).…”

Do Convential Duratios Work in Practice?

“…Serious research in the area of volatility is provided in [15] - [17] for a practical portfolio management. This text introduced a definition of three different regimes of common bond clean price volatility and examines theoretical and practical repercussions of such phenomena as an extension to the existing literature.…”