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Bond portfolio duration, cash flow dispersion and convexity

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  • Donald Smith

Abstract

Immunization is a well-known fixed-income strategy to lock in a target rate of return over a known investment horizon. This is accomplished by structuring the bonds so that the duration of the portfolio matches the time horizon and then rebalancing the portfolio to maintain the match as time passes and yields change. The structural risk to the strategy can be measured by the cash flow dispersion or by the convexity of the immunizing portfolio. The general relationship between the duration, cash flow dispersion and convexity statistics for any date in the current period is derived in the article. Although both statistics measure the risk, convexity is significantly easier to implement in practice.

Suggested Citation

  • Donald Smith, 2010. "Bond portfolio duration, cash flow dispersion and convexity," Applied Economics Letters, Taylor & Francis Journals, vol. 17(17), pages 1669-1672.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:17:p:1669-1672
    DOI: 10.1080/13504850903251249
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    References listed on IDEAS

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    1. Fong, H Gifford & Vasicek, Oldrich A, 1984. "A Risk Minimizing Strategy for Portfolio Immunization," Journal of Finance, American Finance Association, vol. 39(5), pages 1541-1546, December.
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    Cited by:

    1. Bavani Chandra Kumar & Ravindran Ramasamy & Zulkifflee Mohamed, 2020. "Probability Approach in Estimating Value at Risk of Bond Portfolios for Effective Hedging," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(5), pages 502-515, May.
    2. Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2012. "REIT modified duration and convexity," Economics and Business Letters, Oviedo University Press, vol. 1(3), pages 1-7.

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