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DURATION AND INTEREST RATE RISK FOR UNCERTAIN CASH FLOW STREAMS
Author(s) -
Rhys Huw,
Tippett Mark
Publication year - 1996
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1996.tb00406.x
Subject(s) - duration (music) , cash flow , asset (computer security) , econometrics , interest rate , economics , terminal value , actuarial science , financial economics , operating cash flow , monetary economics , finance , computer science , computer security , art , literature
This paper amends the Hicks‐Macaulay‐Samuelson duration analysis to allow for uncertainty in asset cash flows. An asset's duration measure then becomes a random variable which may possess no central moments. We show, however, that a transformed version of the duration measure is normally distributed. This can be used to make probability assessments of the sensitivity ofthe present value of an asset's cash flow stream to interest rate movements.