Abstract
The duration times the credit spread of a bond, denoted DTS, is an effective proxy for its price variance. On an aggregate level, the measure is key to specifying the covariance between bond prices as well. Using a sample of government bond market indices, the author shows that the duration and spread, both on an index level, explain the largest share of the price variance and covariance between government bond markets. The bonds in the indices are denominated in local currency and are hedged against exchange-rate risk. The findings provide new insights for managing bond risk in globally invested portfolios.
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