Riskdata: The Volatility of Low Rates

Traditional, fixed-income risk models are based on the assumption that bond risk is directly proportional to the interest rate, i.e. that the interest-rate distribution is “log-normal.” Two corollaries would then follow.

Firstly, nominal interest rates could never be negative. Furthermore, bond volatility vanishes when interest rates approach zero. These conclusions are obviously wrong, if we observe debt situation in a country such as Germany. Should we then infer that the traditional way