Encyclopedia of Finance

2013 Edition
| Editors: Cheng-Few Lee, Alice C. Lee

Duration Analysis and Its Applications

  • Iraj J. Fooladi
  • Gady Jacoby
  • Gordon S. Roberts
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-5360-4_14

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.

Keywords

Bond price volatility Duration Financial institution management Fixed-income securities Hedging interest rate risk Immunization Insurance companies;banks Macrohedging Pension funds Stochastic process risk 
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Notes

Acknowledgment

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.

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Iraj J. Fooladi
    • 1
  • Gady Jacoby
    • 2
  • Gordon S. Roberts
    • 3
  1. 1.Dalhousie UniversityHalifaxCanada
  2. 2.University of ManitobaWinnipegCanada
  3. 3.York UniversityTorontoCanada