The value of Macaulay duration, probably the most widely used quantification method for measuring interest rate sensitivity of bonds, could roughly be financially interpreted as a percentage change of the bond price if the paral-lel shift of the interest rate equals 1 percentage point along the entire zero-coupon curve and the initial bond price is equal to 100%. The main problem of its practical application lies in the fact that parallel curve shift is a very rare case, and we are more often concerned with predicting short-term rate shifts and considering their consequences for the rest of the yield curve and thus also for bonds with longer maturities. Therefore, it is useful to find a certain value that represents a quantification of the impact of short rate shifts on bond prices with respect to the parameters of bonds. So, the main contribution of this financial engineering research is to design a measure that can be used in the same way as Macaulay duration, but as a response to the change of the short interest rate, for example: in the equation for chang-ing ΔP of a bond, in the equation of the volatility ratio of two bonds, or in the equation for bond portfolio sensitivity. Such a measure is still lacking in finance. We refer to this measure as the “short rate-shift duration”. Since the effect of the short rate shift on the entire yield curve, and thus especially on the price of long-term bonds, is very difficult to predict analytically, we use empirical data to calculate the duration value of the short-term shift and also to calculate its values for the USD and EUR interest markets.

DOI: https://doi.org/10.3846/bm.2022.762