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CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures

An analyst estimates empirical duration by regressing daily changes in a corporate bond index yield on daily changes in a government benchmark yield. The slope coefficient is 1.20. Compared with the analytical (yield-based) duration, the empirical duration of the corporate bond index is most likely to:

Empirical duration reflects the bond's observed yield behavior relative to the benchmark, so it incorporates the yield beta. Analytical duration ignores this, so the two measures generally differ when the bond's yield moves more or less than one-for-one with the benchmark.

  1. Abe reduced by the slope because yield spreads are fixed
  2. Breflect how the bond's yield actually moves with the benchmark, adjusted for the yield betaCorrect
  3. Cbe identical because both measures assume parallel shifts

Explanation

Empirical duration is estimated from observed price or yield behavior and incorporates the yield beta, so it reflects how the bond's yield actually moves relative to the benchmark. Analytical duration assumes a given yield change and does not capture the beta. The claim that both are identical is wrong, because analytical duration ignores the spread behavior seen in the data.

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