Empirical Duration of Corporate Bonds and Credit Market Segmentation

Abstract

This article provides a unified and coherent treatment of the relation between the analytical and empirical duration of corporate bonds based on theoretical and empirical evidence. It examines several possible explanations for the large decline in interest rate sensitivity when crossing from investment-grade to high-yield territory. We discuss several practical applications of using empirical duration to hedge the interest rate exposure in credit portfolios and express views on the direction of interest rates. <b>TOPICS:</b>Fixed-income portfolio management, financial crises and financial market history, information providers/credit ratings, statistical methods