An accurate formula for bond‐portfolio stress testing

Tchuindjo, Leonard

doi:10.1108/15265940810875586

Cited by 6 publications

(10 citation statements)

References 8 publications

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“…Livingston and Zhou (2005) introduce Taylor expansion-based expected cash flows, expected present values and related duration. Tchuindjo (2008) extends this work to convexity. Dierkes and Ortmann (2015) incorporate changes in interest rates and respective yield curves for estimating present values of cash flows using linear approximation.…”

Section: Review Of Literaturementioning

confidence: 66%

Stage-I Shariah compliant Macaulay’s duration model testing

Shah

Sukmana

Fianto

2021

JIABR

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Purpose The purpose of this study is to develop, test and examine econometric methodology for Sharīʿah-compliant duration models of Islamic banks. Design/methodology/approach The research evaluates all existing duration models from Sharīʿah’s perspective and develops a four-stage framework for testing Sharīʿah-compliant duration models. The econometric methodology consists of multiple regression, Johansen co-integration, error correction model, vector error correction model (VECM) and threshold vector error models (TVECM). Findings Regressions analysis suggests that returns on earning assets and interbank offered rates are significant factors for calculating the duration of earning assets, whereas returns paid on return bearing liabilities and average interbank rates of deposits are significant factors for duration of return bearing liabilities. VECM suggests that short run duration converges into long run duration and TVECM suggests that management of assets and liabilities also plays a significant role that can bring about a change of about 15% in respective durations. Practical implications Sharīʿah-compliant duration models will improve risk and Sharīʿah efficiency, which will ultimately improve market capitalization and returns stability of Islamic banks in the long run. Originality/value Sharīʿah-compliant duration models testing provides insight into how various factors, namely, rates of return, benchmark rates and managerial skills of Islamic bank risk managers impact durations of assets and liabilities. It also explains the future course of action for Sharīʿah-compliant duration model testing.

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Section: Review Of Literaturementioning

confidence: 66%

Stage-I Shariah compliant Macaulay’s duration model testing

Shah

Sukmana

Fianto

2021

JIABR

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“…Livingston and Zhou (2005) call the first-order approximation based on the logarithmic transformation the exponential duration. Tchuindjo (2008) developed a more accurate approximation based on a second-order Taylor series.…”

Section: Discussionmentioning

confidence: 99%

“…The idea is to first apply a transformation that approximately linearizes the bond price function, and then approximate the transformed function with a Taylor polynomial. The logarithmic transformation was used by Barber (1995), Livingston and Zhou (2005) and Tchuindjo (2008) to linearize the bond price function [2]. First, expand the log P with a firstorder Taylor polynomial about the current yield to maturity:…”

Section: Approximating Bond Price Sensitivitymentioning

confidence: 99%

“…The power law approximation error is substantially smaller over the entire range of yield shocks. Tchuindjo (2008) developed a better approximation by including a second-order term in the Taylor series of the logarithmic transformation of the price. The transformed price function logðPÞ is approximated by a second-order Taylor polynomial about the current yield y 0 :…”

Section: Power Law Bond Approximationmentioning

confidence: 99%

“…The duration of a bond measures the average life of the bond (Macaulay, 1938) and approximates the price sensitivity of a bond in response to a small change in the yield (Fabozzi, 2008;Daigler and Copper, 1998;Christensen and Sorenson, 1994;Kritzman, 1992;Winkelmann, 1989;Bierwag et al, 1988;Reddington, 1952;Hicks, 1939;Samuelson, 1945). Barber (1995), Livingston and Zhou (2005), and Tchuindjo (2008) developed superior price sensitivity approximations based on a logarithmic transformation of the bond price function. The logarithmic transformation roughly linearizes the bond price function and produces a much more accurate sensitivity approximation, especially for short-term bonds.…”

Section: Introductionmentioning

confidence: 99%

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Power law bond price and yield approximation

Barber

2021

JRF

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PurposeThis paper determines a simple transformation that nearly linearizes the bond price formula. The transformed price can be used to derive a highly accurate approximation of the change in a bond price resulting from a change in interest rates.Design/methodology/approachA logarithmic transformation exactly linearizes the price function for a zero coupon bond and a reciprocal transformation exactly linearizes the price function for a perpetuity. A power law transformation combines aspects of both types of transformations and provides a superior approximation of the bond price sensitivity for both short-term and long-term bonds.FindingsIt is demonstrated that the new formula, based on power-law transformation, is a much better approximation than either the traditional duration-convexity approximation and the more recently developed approximations based on logarithmic transformation of the price function.Originality/valueThe new formula will be used by risk managers to perform stress-testing on bond portfolios. The new formula can easily be inverted, making it possible to relate the distribution of prices (which are observable in the market) to the distribution of yields (which are numerical solutions that are not directly observable).

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Duration in the Bond Market and Application

Jia

2023

Applied Economics and Policy Studies

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An accurate formula for bond‐portfolio stress testing

Cited by 6 publications

References 8 publications

Stage-I Shariah compliant Macaulay’s duration model testing

Stage-I Shariah compliant Macaulay’s duration model testing

Power law bond price and yield approximation

Duration in the Bond Market and Application

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