Abstract: Forty years ago Macaulay proposed the measure of to represent the . . . essence of the time element of a loan (1938, p. 44).1 Hicks independently derived the equivalent average period measuring the . . . [bond price] elasticity with respect to a discount ratio [i.e., factor or discount rate plus unity] (1939, p. 186). The elasticity properties of duration have been successfully employed by several authors in problems involving the reduction of basis risk.2 The use of duration as an alternative time measure has not been as fruitful.3 In fact, an examination of Macaulay's book shows that even he is primarily concerned with the risk-proxying properties of his measure despite the assigned name duration. In this paper we examine the traditional measure of duration and the conditions under which it is valid to use it in risk comparisons. We then propose an alternate measure of This note criticizes the traditional measures of duration and their role in the measurement of basis risk. A theoretically superior measure of basis risk, which is measured in units of time, like duration, is proposed in its place. The properties of the new measure are discussed and compared to those of the traditional measures.
Publication Year: 1979
Publication Date: 1979-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 234
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