italyit

# Duration Times Spread: a measure of spread exposure in credit portfolios

01-05-2020 | Ricerca

Duration Times Spread (DTS) is the market standard method for measuring the credit volatility of a corporate bond. It is calculated by simply multiplying two readily available bond characteristics: the spread-durations and the credit spread. The result is a single number that can be used to compare credit risk across a wide range of bonds.

• Patrick
Houweling

• The DTS concept was originally developed by Robeco researchers in the early 2000s
• It has become the standard method for measuring the credit volatility
• This measure can be used to compare credit risk across a wide range of bonds

Suppose we want to compare two very different bonds, where the spread durations are one year and 10 years, and the credit spreads are 500 bps and 50 bps, for bond A and bond B, respectively. Both have a DTS of 500 and therefore will have the same expected credit volatility.

DTS only predicts the credit risk of the bonds, not their default risk. In our example, investors clearly perceive bond A to be riskier, as its credit spread is the highest of the two bonds. To predict default risk, one could use credit ratings or distress risk measures, such as distance-to-default. Moreover, DTS does not say anything about interest rate risk, because it only predicts risk driven by credit spread fluctuations. To measure a bond’s exposure to changes in risk-free interest rates, an investor can simply use the interest rate duration.

The DTS concept has various advantages. First and foremost, DTS is a more accurate predictor of future volatility than methods previously used by investors. Second, DTS is very simple to calculate, which makes it easy for portfolio managers to use in their daily work. Third, changing market circumstances are reflected in the DTS: if credit spreads double from one day to the next, so does the risk estimate.

Why should one multiply duration and spread? Why not use another formula? One can easily prove that by using DTS as the risk measure, we assume that credit spreads move in a relative fashion rather than a parallel fashion. In our example, if the credit spread of bond A moves from 500 to 550 bps (i.e. a 10% increase), then the credit spread of bond B will move from 50 to 55 bps (also 10% increase), and not from 50 to 100 bps. Our empirical research shows that relative spread changes indeed reflect credit markets more accurately than parallel spread changes.

DTS was originally developed by Robeco researchers in 2003

DTS was originally developed by Robeco researchers in 2003. Shortly thereafter, we started using it to monitor the credit risk of all of Robeco’s credit portfolios. A joint project with Lehman Brothers led to the publication of the results in The Journal of Portfolio Management in 2007.1 DTS is now widely accepted among investors, and it has been implemented in leading risk management software, including MSCI RiskMetrics and Bloomberg Barclays POINT.

1 Ben Dor, A., Dynkin, L., Hyman, J., Houweling, P., Van Leeuwen, E., and Penninga, O., ‘DTSSM (Duration Times Spread)’, The Journal of Portfolio Management, 2007, vol. 33. no. 2, pp. 77-100

Also read: DTS - measuring credit risk (December 2019)

Disclaimer

La relazione non è consultabile da utenti di paesi in cui l'offerta di servizi finanziari esteri non è consentita, quali i soggetti statunitensi.

I dati forniti non verranno comunicati a terzi. Le informazioni sono destinate esclusivamente agli investitori professionisti. Tutte le richieste pervenute saranno verificate.

Gli argomenti collegati a questo articolo sono:

### Disclaimer

Confermo di essere un cliente professionale

Le informazioni e le opinioni contenute in questa sezione del Sito cui sta accedendo sono destinate esclusivamente a Clienti Professionali come definiti dal Regolamento Consob n. 16190 del 29 ottobre 2007 (articolo 26 e Allegato 3) e dalla Direttiva CE n. 2004/39 (Allegato II), e sono concepite ad uso esclusivo di tali categorie di soggetti. Ne è vietata la divulgazione, anche solo parziale.

Al fine di accedere a tale sezione riservata, si prega di confermare di essere un  Cliente Professionale, declinando Robeco qualsivoglia responsabilità in caso di accesso effettuato da una persona che non sia un cliente professionale.

In ogni caso, le informazioni e le opinioni ivi contenute non costituiscono un'offerta o una sollecitazione all'investimento e non costituiscono una raccomandazione o consiglio, anche di carattere fiscale, o un'offerta, finalizzate all'investimento, e non devono in alcun caso essere interpretate come tali.

Prima di  ogni investimento, per una descrizione dettagliata delle caratteristiche, dei rischi e degli oneri connessi, si raccomanda di esaminare il Prospetto, i KIIDs delle classi autorizzate per la commercializzazione in Italia, la relazione annuale o semestrale e lo Statuto, disponibili sul presente Sito o presso i collocatori.
L’investimento in prodotti finanziari è soggetto a fluttuazioni, con conseguente variazione al rialzo o al ribasso dei prezzi, ed è possibile che non si riesca a recuperare l'importo originariamente investito.