Effective Duration
Effective Duration — Model duration accounting for cash-flow optionality.
Definition
Effective Duration refers to model duration accounting for cash-flow optionality. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
Policy-sensitive rates set the discount factor for almost every other asset class. When model duration accounting for cash-flow optionality shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what effective duration is saying. If model duration accounting for cash-flow optionality moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Read spot, forwards, and real vs nominal together — one leg alone invents a story. Prefer a short written null hypothesis for Effective Duration: what would falsify the current reading in the next window?