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On the Relative Importance of Duration Constraints

Author

Listed:
  • Jacob Paroush

    (Department of Economics, Bar-Ilan University, Ramat-Gan 52100, Israel)

  • Eliezer Z. Prisman

    (Faculty of Administrative Studies, York University, Toronto, Ontario, Canada M3J 1P3)

Abstract

This paper uncovers an implicit assumption, and its implications, made in the process of maximizing yield (or minimizing costs) subject to the duration constraints. Using linear programming results, it is shown that this technique is sensible only if the yield of a bond is a linear function of its duration measures. Utilizing this result the paper analyzes the relative importance of the duration constraints. Former studies have hinted that the first order duration may be the most important. It is shown here there is no reason to satisfy the first duration constraint with priority over satisfaction of a higher order duration constraint. Practitioners who use duration techniques for portfolio immunization must be aware of such an important counter-intuitive result.

Suggested Citation

  • Jacob Paroush & Eliezer Z. Prisman, 1997. "On the Relative Importance of Duration Constraints," Management Science, INFORMS, vol. 43(2), pages 198-205, February.
  • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:2:p:198-205
    DOI: 10.1287/mnsc.43.2.198
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    Citations

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    Cited by:

    1. Balbas, Alejandro & Ibanez, Alfredo, 1998. "When can you immunize a bond portfolio?," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1571-1595, December.
    2. Balbás, Alejandro & Montagut, Esperanza H. & Pérez Fructuoso, María José, 2004. "Hedging bond portfolios versus infinitely many ranked factors of risk," DEE - Working Papers. Business Economics. WB wb043312, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    3. Sergio Ortobelli & Sebastiano Vitali & Marco Cassader & Tomáš Tichý, 2018. "Portfolio selection strategy for fixed income markets with immunization on average," Annals of Operations Research, Springer, vol. 260(1), pages 395-415, January.

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