Assuming you need to pick a bond to short. Is it better a bond with large or small convexity (all other things being equal)?
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$\begingroup$ Why do you need to pick a bond to short? If you're doing it in order to hedge interest rate riak,, then 1 you should consider whether other instruments, such as interest rate swap, or rate or bond futures, might work better, 2 centeris paribus, try to offset the convexity of whatever you're hedging. $\endgroup$– Dimitri VulisCommented Jul 8 at 21:05
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$\begingroup$ "Two functions have the same value and same first derivative, but different second derivative, which should I prefer?" - The hypothesis is impossible, no two bonds have differing convexity and all else the same. For bonds with differing convexities you have to way up the change in value of the convexity relative to the change in value of the other parameters (that have also changed) that suits your model. $\endgroup$– Attack68 ♦Commented Jul 16 at 13:04
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If this is purely speculative and all else the same you would choose to sell the bond with the least convexity.
But, convexity is priced by the market, so in reality a bond with lower convexity relative to a higher convexity bond (or portfolio) of equal duration would also trade cheaper (usually).
