Empirical Duration

DEFINITION of 'Empirical Duration'

The calculation of a bond's duration based on historical data. Empirical duration is estimated statistically using historical market-based bond prices and historical market-based Treasury yields. When the historical yields change, the historical bond prices will change accordingly, which forms that basis for empirical duration. Regression analysis is the statistical process used to estimate empirical duration.

Duration is the percentage change in a bond's price with a 100-basis-point change in yield.

BREAKING DOWN 'Empirical Duration'

The calculation of empirical duration has some advantages and disadvantages over other duration calculations, such as effective duration or modified duration. The advantages of using empirical duration include that the estimate does not rely on theoretical formulas and analytic assumptions, and the only inputs needed are a reliable series of bond prices and a reliable series of Treasury yields.

Some disadvantages are that a reliable series of a bond's price may not be available, and the series of prices that is available might not be market based, but rather modeled or matrix priced (the price is based on a similar security).

RELATED TERMS
  1. Key Rate Duration

    Holding all other maturities constant, this measures the sensitivity ...
  2. Effective Duration

    A duration calculation for bonds with embedded options. Effective ...
  3. Empirical Probability

    A form of probability that is based on some event occurring, ...
  4. Pickup

    A gain in yield made by selling one bond and buying another. ...
  5. Immunization

    A strategy that matches the durations of assets and liabilities ...
  6. Immediate Or Cancel Order - IOC

    An order to buy or sell a security that if not immediately filled, ...
Related Articles
  1. Markets

    Advanced Bond Concepts: Duration

    The term duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an ...
  2. Investing

    Calculating the Macaulay Duration

    The weighted average term to maturity of the cash flows from a bond.
  3. ETFs & Mutual Funds

    TLT: Why Low Interest Rates Are Dangerous for Investors

    Explore how the rally in long-dated Treasury bonds has escalated the risks in ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF.
  4. Markets

    Do Long-Term Bonds Have A Greater Interest Rate Risk Than Short-Term Bonds?

    The answer is yes, and there are two main reasons why.
  5. ETFs & Mutual Funds

    Rising Interest Rates? Not A Problem For These Funds

    As the United States moves further into recovery, it's only a matter of time before the Fed begins raising interest rates. For investors in the bond market, this could prove problematic. However, ...
  6. Markets

    Advanced Bond Concepts: Conclusion

    You have now learned some of the more advanced topics associated with bonds. Let's run through a quick recap of what we discussed in this tutorial: Bonds vary according to characteristics ...
  7. ETFs & Mutual Funds

    The Top 5 Bond Mutual Funds for 2016

    Learn about bond mutual funds that investors may want to consider for 2016. Understand why the risk of rising interest rates is a concern heading into 2016.
  8. ETFs & Mutual Funds

    Three Ways To Play Bonds In 2014

    The New Year promises one certainty in the bond market and that’s the Fed will finally begin its taper and end its bond-buying programs. For those investors in long dated bonds, now could be ...
  9. Managing Wealth

    Introduction To The Portfolio Dedicated Strategy

    Dedicated Investment Portfolio strategies have been used by institutional investors like pension funds and insurance companies for many years and have gained some popularity with individual investors ...
  10. Markets

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
RELATED FAQS
  1. Which is a better metric, modified duration or Macaulay duration?

    Learn why the modified duration is a more useful metric than the Macaulay duration, and understand how the measures are different ... Read Answer >>
  2. What is the average profit margin of a company in the chemicals sector?

    Learn more about the Macaulay duration and the modified duration, how to calculate a bond's Macaulay duration and modified ... Read Answer >>
  3. For what financial instruments is a modified duration relevant?

    Find out about modified duration, financial instruments the modified duration is used for and how to calculate the modified ... Read Answer >>
  4. What level of return on equity is average for companies in the chemicals sector?

    Learn more about the modified duration in fixed income securities and how to calculate a bond's modified Macaulay duration ... Read Answer >>
  5. What is the risk return tradeoff for stocks?

    Learn more about the Macaulay duration, how to calculate the Macaulay duration for a bond and how the Macaulay duration is ... Read Answer >>
  6. What is the formula for calculating the capital to risk weight assets ratio for a ...

    Learn about the Macaulay duration and zero-coupon bonds, the formula used for the calculation and how to calculate the Macaulay ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center