Chapter 16. Yield Curve Risk Measures

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

STEVEN V. MANN, PhD

Professor of Finance, Moore School of Business, University of South Carolina

Abstract: Duration is a useful metric for assessing a bond portfolio's sensitivity to a parallel shift in the reference yield curve (e.g., the Treasury yield curve). When the yield curve shift is not parallel, however, two bond portfolios with the same duration will not generally experience the same return performance. To evaluate differences in expected performance across portfolios, it is therefore necessary to quantify the price impact due to changes in the shape, as opposed to a parallel shift, of the yield curve. The risk exposure of a portfolio to changes in the yield curve is called yield curve risk. Several approaches have been suggested for measuring yield curve risk.

Keywords: yield curve risk, cash-flow distribution analysis versus a benchmark, rate duration, key rate durations, duration vectors, partial durations, slope elasticity measure, yield curve reshaping duration, long-end duration (LEDUR), short-end duration (SEDUR)

Duration and convexity are useful measures for approximating how the value of a bond portfolio or a bond index will change for a parallel shift in interest rates. Yet, empirically, both published studies (see, e.g., Litterman and Scheinkman, 1991, and Jones, 1991) and proprietary studies by asset management firms have found that ...

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