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Market Risk Measurement: Key Rate Duration as an asset allocation instrument

Zeballos, David (2011): Market Risk Measurement: Key Rate Duration as an asset allocation instrument.

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Abstract

Currently, the financial institutions are exposed to different types of risks, including the market, credit and operational risks; therefore, there has increased the need for new financial and analytical instruments for the risk management.

Among the traditional ones we have the duration, which measures the bond price sensitivity to changes of interest rates. Nevertheless, it has two disadvantages: it assumes parallel changes in the yield curve and it is inaccurate if we consider large percentage changes. In this sense, a tool that allows correcting these disadvantages is The Key Rate Durations. The present work tries to provide an additional tool to the investment analysis, so the economic agents can adopt better decisions.

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