Jul 10

Key rate shift: Concept – 6 min screencast

by David Harper, CFA, FRM, CIPM

The advantage of duration is convenience: a single measure summarizes the sensitivity of bond price to yield changes. The disadvantage of duration owes to the same thing: duration is a single-factor approach. As a (first-order derivative) linear approximation, it assumes a parallel shift in the yield curve.

The key rate shift technique builds a set (vector) of key rates along the term structure; e.g., the one-year rate, the two-year rate. This is multi-factor: we can now model a more realistic shift in the term structure.

Screencast: