When DDa > DDl, DDe>0 - upward steepenign yield is concern (price risk).
When DDa < DDl, DDe<0, flattening yield curve is concern (reinvestment risk).
I understand the first one. Because when yield is upward-sloping, the price of asset will fall faster than the value of liability.
Can someone explain the second situation please? What happens with a flattening yield curve? Does the interest rate decrease in this case?
What does DDe mean again? Refresh my memory!
Dollar Duration of Equity~
The yield curve tilts down at the long end, and tilts up at the short end. I think this needs to assume that the present values of assets and liabilities are almost the same, as is the case with immunizations. In this case, DDl > DDa presents reinvestment risk because a flattening yield curve will lower interest income on coupon proceeds, and if the durations of assets and liabilities are the same, implying higher coupon rates on the asset holdings, the reinvesment downside risk on the asset side is not offset by the reinvestment risk upside on your liabilities. This is also usually true because assets typically have longer maturities in this context.