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IPFS News Link • Economy - Economics USA

Roll Risk and Convexity in the U.S. Debt Market


Convexity is an outcome. Convexity when plotted looks like it goes through the roof. Hyper-inflation is price convexity. Looking at extreme outcomes isn't as interesting as understanding the drivers that create them. please note, I am not talking about typical bond convexity, but rather system behavior outcome as convex.

Most complex systems have multiple inputs, let's call them X, Y and Z. In some systems these components are independent and additive. For example if I make lemonade for a living, my Lemons, Sugar and Cups are mostly independent cost inputs. Inflation may make them all correlate, but by and large they are independent and slowly rising as a function of inflation X+Y+Z = cost of lemonade.