Abstract
This paper provides a continuous-time contingent claims framework for the duration vector models of Chambers, Carleton, and McEnally [1988], Prisman and Shores [1988], and others, by embedding these into Merton's [1973] stochastic interest rate option pricing model. Unlike the traditional comparative static duration approach, the duration vector model allows non-parallel term structure shifts resulting from height. slope, and curvature factors. The upper and lower bounds of the duration vectors of bond options and callable bonds are investigated. An empirical technique is suggested for the computation of the duration vectors of bond options and callable bonds by using the implied volatility information contained in the market prices of these contingent claims securities.
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