Prague Economic Papers 2017, 26(5):602-629 | DOI: 10.18267/j.pep.636

Volatility Strangeness of Bonds - How to Define and What Does it Bring?

Bohumil Stádník¹, Václav Žďárek²

¹ Faculty of Finance and Accounting, University of Economics in Prague, Czech Republic (bohumil.stadnik@vse.cz)

² Škoda Auto Vysoká Škola, o.p.s, Mladá Boleslav, Czech Republic

The aim of this article is to complement the existing economic and financial strand of the literature by defining three alternative regimes of the clean price volatility of a bond with respect to the level of interest rates in the economy. The suggested method takes into account responses to the changing nature of financial markets and allows for the possibility of observing negative interest rates. Our approach enables to find particular values of switching points between alternative regimes. After showing main theoretical steps, an investigation of the dependence of such points on key parameters of bonds is provided. An empirical illustration follows, accompanied by a discussion of theoretical and practical effects of this bond property. This approach offers both theorists and interested practitioners a way of overcoming difficulties associated with computations because of the complicated theoretical background. The results can be generalised, so that they apply both to the life of a bond and to the behaviour of a portfolio of bonds at a point of time.

Keywords: bond /portfolio of bonds, volatility regimes, price/yield sensitivity, negative interest rates

JEL classification: G1, G10, G12, G14

Published: October 1, 2017  Show citation