A duration gap measure that takes into account a bank’s overall exposure to interest rate risk. It is calculated as the difference between the modified duration of the assets and liabilities adjusted by the bank’s financial leverage. Symbolically:

Leverage-adjusted duration gap = D_A – D_L × K

Where: D_A is the duration of assets; D_L is the duration of liabilities; and K is the ratio of the market value of liabilities to the market value of assets (K = L/A).

This duration measure reflects the extent of duration mismatch in a bank’s balance sheet. The wider the gap in absolute terms, the more a bank is exposed to interest rate changes, and vice versa. A bank with a positive gap will experience a decrease in the market value of its net worth (equity) at times interest rates move up. Net worth increases for a bank with a negative gap. A zero gap means net worth will be unaffected by interest rate moving either way.

It is known for short as LADG.