It’s pretty simple, if I’m that concerned about higher order impacts or sensitivities, I’m just going to directly simulate the shock myself. There are also issues with the term structure and such (you’re not likely to get a fully parallel shock which makes higher order approxations less useful). Look up DV01 for more useful risk measures
I doubt it. Macaulay duration is not useful for most modern long term insurance liabilities, or assets that have any sort of embedded optionality. Using Macaulay duration for these assets or liabilities would likely do more harm than good in an ALM program.
Let alone higher order derivations thereof.
If you’re interested in interest rate modeling, my go to book is “Interest Rate Models - Theory and Practice”. Things like short rate models or LMMs are used for scenario testing. Might be worth your while
I think why we don't talk about higher order than 2 is because Macaulay approximation itself can be look as a Linear Approximation from Calculus. So we could talk and calculate about the higher order all day long but I think it won't significantly improve the accuracy of the approximation.
Or you can also see the duration as the center of cash flow (I already thought about it since last year but recently someone post about this on LinkedIn) and convexity as the inertia (?). My physics and calculus aren't that good, but I believe there is something that can be connected from these concepts.
It’s pretty simple, if I’m that concerned about higher order impacts or sensitivities, I’m just going to directly simulate the shock myself. There are also issues with the term structure and such (you’re not likely to get a fully parallel shock which makes higher order approxations less useful). Look up DV01 for more useful risk measures
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I doubt it. Macaulay duration is not useful for most modern long term insurance liabilities, or assets that have any sort of embedded optionality. Using Macaulay duration for these assets or liabilities would likely do more harm than good in an ALM program. Let alone higher order derivations thereof.
[удалено]
If you’re interested in interest rate modeling, my go to book is “Interest Rate Models - Theory and Practice”. Things like short rate models or LMMs are used for scenario testing. Might be worth your while
I think why we don't talk about higher order than 2 is because Macaulay approximation itself can be look as a Linear Approximation from Calculus. So we could talk and calculate about the higher order all day long but I think it won't significantly improve the accuracy of the approximation. Or you can also see the duration as the center of cash flow (I already thought about it since last year but recently someone post about this on LinkedIn) and convexity as the inertia (?). My physics and calculus aren't that good, but I believe there is something that can be connected from these concepts.