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UP's avatar

“Duration is volatility in disguise”

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Meyrick Chapman's avatar

Waldo Tobler stated that the First Law of Geography is "everything is related to everything else, but near things are more related than distant things." Duration is very near to volatility.

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Andy Fately's avatar

this was an excellent description. as an options trader, I always equated time and volatility via sigma route T, but your's is more elegant

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Andrew Derry's avatar

Great article. One question: in your first chart, is the denominator for the ratio the dv01 or notional amount of outstanding debt? The former seems the right measure to me, but wanted to double check?

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Meyrick Chapman's avatar

Thanks Andrew. Stock of debt is the denominator. My reasoning is the quarterly DV01 is new flow of risk which has to be accommodated by existing investors (represented by outstanding marketable debt).

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Andrew Derry's avatar

Thanks Meyrick, that makes sense. I was just wondering whether there was a nuance arising from the current maturity profile of the outstanding debt. With a historically high proportion of short-term debt (is that statement correct?) perhaps the upcoming coupon issuance will have an even greater impact than your chart suggests? Either way, it’s a key observation, thank you.

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Meyrick Chapman's avatar

Yes, "upcoming coupon issuance will have an ... impact" was the main point I was trying to convey in the piece.

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