RT Journal Article
SR Electronic
T1 Calculating the Price of Bond Convexity
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 99
OP 106
DO 10.3905/jpm.2006.611809
VO 32
IS 2
A1 Smit, Linda
A1 Swart, Barbara
YR 2006
UL http://jpm.pm-research.com/content/32/2/99.abstract
AB The global decline in interest rates has created a significant increase in the present value of pension funds; convexity plays an important roleāthe convexity bias in the yield curve is well known. While the expectations hypothesis is valid for the money market sector of the yield curve, the remainder is determined by what we can call the expected volatility hypothesis, which is based on the principle of no-arbitrage between convexity and theta in the value of a bond portfolio. The results of a term structure model that constructs the yield curve using a closed-form solution are compared to actual data.TOPICS: Pension funds, factor-based models, fixed-income portfolio management