Inside the Yield Book: The Classic That Created the Science of Bond Analysis, 3rd Edition

Chapter 2

Volatility and Tracking Error

Introduction

In Chapter 1, we developed a trendline-based zero-coupon bond model of duration targeting. Our key findings: (1) Trendline (TL) returns represent the average return across all paths to a given end point; (2) when the accrual and duration factors are equal, the trendline duration is zero and annualized returns converge to the initial yield regardless of whether the final yield is higher or lower than the initial yield; and (3) the horizon over which the convergence to yield occurs acts as an effective maturity for the duration-targeted strategy

We now turn to the relationship between yield volatility and return volatility. Volatility is always calculated as the standard deviation of the relevant ...