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Macaulay durations for nonparallel shifts

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  • Harry Zheng

Abstract

Macaulay duration is a well-known and widely used interest rate risk measure. It is commonly believed that it only works for parallel shifts of interest rates. We show in this paper that this limitation is largely due to the traditional parametric modelling and the derivative approach, the Macaulay duration works for non-parallel shifts as well when the non-parametric modelling and the equivalent zero coupon bond approach are used. We show that the Macaulay duration provides the best one-number sensitivity information for non-parallel interest rate changes and that a Macaulay duration matched portfolio is least vulnerable to the downside risk caused by non-parallel rate changes under some verifiable conditions. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Harry Zheng, 2007. "Macaulay durations for nonparallel shifts," Annals of Operations Research, Springer, vol. 151(1), pages 179-191, April.
    • Handle: RePEc:spr:annopr:v:151:y:2007:i:1:p:179-191:10.1007/s10479-006-0115-7
    DOI: 10.1007/s10479-006-0115-7
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    1. Fong, H Gifford & Vasicek, Oldrich A, 1984. "A Risk Minimizing Strategy for Portfolio Immunization," Journal of Finance, American Finance Association, vol. 39(5), pages 1541-1546, December.
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    3. R. B. Vinter & H. Zheng, 2003. "Some Finance Problems Solved with Nonsmooth Optimization Techniques," Journal of Optimization Theory and Applications, Springer, vol. 119(1), pages 1-18, October.
    4. Zheng, H. & Thomas, L.C. & Allen, D.E., 2001. "The Duration Derby: A Comparison of Duration Based Strategies in Asset Liability Management," Papers 01-176, University of Southampton - Department of Accounting and Management Science.
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    Cited by:

    1. Zaremba Leszek, 2017. "Does Macaulay Duration Provide The Most Cost-Effective Immunization Method – A Theoretical Approach," Foundations of Management, Sciendo, vol. 9(1), pages 99-110, February.
    2. Jörgen Blomvall & Jonas Ekblom, 2018. "Corporate hedging: an answer to the “how” question," Annals of Operations Research, Springer, vol. 266(1), pages 35-69, July.

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