When I calculate the Macaulay Duration of my portofolio (vanilla bonds) Should i have to use clean or dirty price to price my portfolio? What is the logic to use one or the other?
Thanks a lot!
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2$\begingroup$ See quant.stackexchange.com/q/42658/50071 $\endgroup$– SharadCommented Dec 2, 2020 at 15:53
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Update: Please follow the link in @Sharad's comment.
Original:
From a purely theoretical point of view, I would go with the clean price. My reasoning is, that only future cash flows can ultimately bear interest rate risk.
Nevertheless, you could argue that the accrued interest resides in some overnight cash account and that you want to disclose interest rate risk on the overnight pillar as well.
Numerically, the PV01 (PV impact of a 1BP shock in the rate) is nearly the same under both approaches (i.e. the overnight pillar has very little sensitivity) but the normalising factor $\frac{1}{PV}$ is of course off by $\tau c$, with $\tau$ the accrual period and $c$ the periodic coupon.
answered Dec 2, 2020 at 15:28