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Key Duration Analytics

Emily Hollis, CFA Partner

Screen Shot 2014-09-11 at 3.26.29 PMWhile effective duration is a critical tool in portfolio analysis and balance sheet risk management, it is important to recognize that this single duration number is an estimate of an asset’s (or liability’s) sensitivity to a parallel shift in interest rates. Not all yield curve shifts are parallel. Key rate duration measures the effect of a change in the yield curve that is localized at a particular maturity and restricted to the immediate vicinity of that maturity. Robust risk management through key rate duration analytics requires us to understand that, although changes in interest rates are often highly correlated across the curve, in reality the slope and shape of the yield curve changes over time—sometimes dramatically so.

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