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Arbitrage opportunities and immunization

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  • Joel Barber
  • Mark Copper

Abstract

It is often argued that an immunization strategy violates arbitrage-free equilibrium. Because immunization is a static concept, we contend that this argument is not valid. This paper examines the immunization strategy in a dynamic setting, and shows that global immunization is feasible for any arbitrage-free affine term structure model, including the parallel shift model. Further, we show that immunization does not violate arbitrage-free pricing because the cost of immunization over time is positive. Consequently, immunization strategies based upon commonly used duration, measures are not theoretically unsound. Copyright Academy of Economics and Finance 2006

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jecfin:v:30:y:2006:i:1:p:133-139
    DOI: 10.1007/BF02834280
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    References listed on IDEAS

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    1. Cooper, I. A., 1977. "Asset Values, Interest-Rate Changes, and Duration," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(5), pages 701-723, December.
    2. 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.
    3. 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.
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    5. Xueping Wu, 2000. "A New Stochastic Duration Based on the Vasicek and CIR Term Structure Theories," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(7‐8), pages 911-932, September.
    6. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    7. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    8. Xueping Wu, 2000. "A New Stochastic Duration Based on the Vasicek and CIR Term Structure Theories," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(7‐8), pages 911-932, September.
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