Abstract
This paper evaluates the relative performances of three alternative bond price volatility approximations: Macaulay duration, convexityaugmented Macaulay duration, and an alternative proposed by the authors. Unlike the first two methods, the third is exact rather than approximate in predicting changes in zero-coupon bond prices. In addition, the alternative improves on the accuracy of the Macaulay formula and, for large interest rate changes, of the convexityaugmented formula. For small changes, the accuracy of our proposed and of convexity are similar. Finally, calculation of price changes is considerably more computationally efficient using our proposed formulation, providing it certain pedagogical advantages over convexity.(JEL: G12)
Recommended Citation
(2005)
"Duration and bond price volatility: Some further results,"
Journal of Economics and Finance Education: Vol. 4:
Iss.
1, Article 3.
Available at:
https://scholarship.rollins.edu/jefe/vol4/iss1/3
