When Can you Immunize a Bond Portfolio?
AbstractThis paper presents a condition equivalent to the existence of a Riskless Shadow Asset that guarantees a minimum return when the asset prices are convex functions of interest rates or other state variables. We apply this lemma to immunize default free and option free coupon bonds and reach three main conclusions. First, we give a solution to an old puzzle: why do simple duration matching portfolios work well in empirical studies of immunization even though they are derived in a model inconsistent with equilibrium and shifts on the term structure of interest rates are not parallel, as as sumed? Second, we establish a clear distinction between the concepts of immunized and maxmin portfolios. Third, we develop a framework that includes the main results of this literature as special cases. Next, we present a new strategy of immunization that consists in matching duration and minimizing a new linear dispersion measure of immunization risk.
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Bibliographic InfoPaper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/6346.
Length: 1597 p.
Date of creation: 1998
Date of revision:
Publication status: Published in Journal of Banking & Finance (1998) v. 22, p.1571-1595
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Web page: http://www.uc3m.es
Immunization; Maxmin portfolio; Weak immunization condition; Worst shock; Dispersion measures;
Other versions of this item:
- Balbás, Alejandro & Ibañez, Alfredo, . "When can you immunize a bond portfolio?," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/7078, Universidad Carlos III de Madrid.
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- Marida Bertocchi & Rosella Giacometti & Stavros A. Zenios, 2000.
"Risk Factor Analysis and Portfolio Immunization in the Corporate Bond Market,"
Center for Financial Institutions Working Papers
00-40, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Bertocchi, Marida & Giacometti, Rosella & Zenios, Stavros A., 2005. "Risk factor analysis and portfolio immunization in the corporate bond market," European Journal of Operational Research, Elsevier, vol. 161(2), pages 348-363, March.
- 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.
- Balbas, Alejandro & Ibanez, Alfredo & Lopez, Susana, 2002. "Dispersion measures as immunization risk measures," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1229-1244, June.
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