The Relationship Between Risk and Maturity In A Stochastic Setting

This paper explores the interest rate sensitivity of the prices of bonds and other securities when the instantaneous interest rate follows a Markov process. We show that whenever the interest rate describes a diffusion process the sensitivity of zero‐coupon bonds increases with maturity. More generally, we characterize the risk‐maturity relationship for contingent claims. This investigation yields a new property of option prices in the case where the underlying security price is a diffusion. Copyright © 1992, Wiley Blackwell. All rights reserved

Duke Scholars

Author Paul H. Zipkin Fuqua School of Business