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Duration Gap

A measure of the mismatch between assets and liabilities. By definition, it is the weighted duration of assets minus the product of the weighted duration of liabilities and the ratio of total liabilities to total assets. The following formula illustrates how duration gap is calculated:

DurGap = DurA – WL × DurL

Where: DurA and DurL denote the weighted durations of assets and liabilities, respectively; WL is the the ratio of total liabilities to total assets.

The duration gap is used by financial institutions as a measure of interest rate risk.

For more on duration gap, see: duration gap (financial analysis).


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