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Bond Immunization When Short-Term Interest Rates Fluctuate More Than Long-Term Rates

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  • Khang, Chulsoon

Abstract

In an important article in 1971, Fisher and Weil [4] demonstrated that it is possible to immunize a portfolio of default-free coupon bonds against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the return expected at purchase. Immunization may be achieved by constructing a portfolio whose average duration is equal to the length of the investor's planning period. The computation of duration that produces immunization is dependent on the nature of the assumed stochastic interest rate shocks. Fisher and Weil derive the duration that will produce immunization for additive shifts in the yield curve under instantaneous compounding, e.g., g(t) + λ where g(t) is the instantaneous interest rate at time t and λ is a random shift parameter.

Suggested Citation

  • Khang, Chulsoon, 1979. "Bond Immunization When Short-Term Interest Rates Fluctuate More Than Long-Term Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(5), pages 1085-1090, December.
    • Handle: RePEc:cup:jfinqa:v:14:y:1979:i:05:p:1085-1090_00
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    Citations

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    Cited by:

    1. Cláudia Simões & Luís Oliveira & Jorge M. Bravo, 2021. "Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits," Risks, MDPI, vol. 9(4), pages 1-28, March.
    2. Ventura Bravo, Jorge Miguel & Pereira da Silva, Carlos Manuel, 2006. "Immunization using a stochastic-process independent multi-factor model: The Portuguese experience," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 133-156, January.
    3. Carcano, Nicola & Foresi, Silverio, 1997. "Hedging against interest rate risk: Reconsidering volatility-adjusted immunization," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 127-141, February.
    4. Marek Kałuszka & Alina Kondratiuk-Janyska, 2004. "On Duration-Dispersion Strategies for Portfolio Immunization," FindEcon Chapters: Forecasting Financial Markets and Economic Decision-Making, in: Władysław Milo & Piotr Wdowiński (ed.), Acta Universitatis Lodziensis. Folia Oeconomica nr 177/2004 - Forecasting and Decision-Making in Financial Markets, edition 1, volume 127, chapter 12, pages 191-202, University of Lodz.
    5. Joseba Iñaki De La Peña & Iván Iturricastillo & Rafael Moreno & Francisco Román & Eduardo Trigo, 2021. "Towards an immunization perfect model?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1181-1196, January.
    6. Luís Oliveira & João Vidal Nunes & Luís Malcato, 2014. "The performance of deterministic and stochastic interest rate risk measures:," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(3), pages 141-165, December.
    7. Babbel, David F. & Merrill, Craig & Panning, William, 1995. "Default risk and the effective duration of bonds," Policy Research Working Paper Series 1511, The World Bank.
    8. Jorge Miguel Ventura Bravo & Carlos Manuel Pereira da Silva, 2005. "Immunization Using a Parametric Model of the Term Structure," Economics Working Papers 19_2005, University of Évora, Department of Economics (Portugal).
    9. Joel Barber & Mark Copper, 2006. "Arbitrage opportunities and immunization," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(1), pages 133-139, March.
    10. Joel Barber & Mark Copper, 1998. "Bond immunization for additive interest rate shocks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 22(2), pages 77-84, June.
    11. Balbas, Alejandro & Ibanez, Alfredo, 1998. "When can you immunize a bond portfolio?," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1571-1595, December.
    12. Almeida, Caio & Lund, Bruno, 2014. "Immunization of Fixed-Income Portfolios Using an Exponential Parametric Model," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 34(2), November.
    13. Gerald O. Bierwag, 1987. "Bond Returns, Discrete Stochastic Processes, And Duration," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(3), pages 191-209, September.
    14. Harry Zheng, 2007. "Macaulay durations for nonparallel shifts," Annals of Operations Research, Springer, vol. 151(1), pages 179-191, April.
    15. Barber, Joel R. & Copper, Mark L., 1998. "A minimax risk strategy for portfolio immunization," Insurance: Mathematics and Economics, Elsevier, vol. 23(2), pages 173-177, November.

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