Un-) Importance of the No-Arbitrage Conditio

Speaker(s)

Manfred Jäger-Ambrozewicz

Affiliation

Berlin University of Applied Science

Date

Dec. 20, 2017, 2:15 p.m.

Room

room 5820

Title in Polish

Measuring Interest Rate Risk using Factor Duration – The

Seminar

Seminar of Quantitative Finance

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The duration of Macaulay is a very intuitive measure of interest rate risk of fixed income securities but of limited use, as it is consistent with parallel shifts of the term structure only. We consider duration vectors that are consistent with realistic dynamics of the term structure. Duration vectors based on dynamic Nelson-Siegel representations, Principal Components Analysis and ad hoc empirical factors are introduced and compared. These approaches are consistent with realistic term structure dynamics and rather intuitive but in general inconsistent with the no-arbitrage condition and consequently also inconsistent with asset pricing. Fortunately duration vectors appropriately defined fit naturally with affine term structure models. Thus duration vectors based on affine term structure models can naturally be made consistent with no-arbitrage.

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