Immunization Using a Parametric Model of the Term Structure
In this paper, we develop a new immunization model based on a parametric specification of the term structure of interest rates. The model extends traditional duration analysis to account for both parallel and non-parallel term structure shifts that have an economic meaning. Contrary to most interest rate risk models, we analyse both first-order and second-order conditions for bond portfolio immunization and conclude that the key to successful protection will be to build up a bond portfolio such that the gradient of its future value is zero, and such that its Hessian matrix is positive semidefinite. In addition, we provide explicit formulae for new parametric interest rate risk measures and present alternative approaches to implement the immunization strategy. Furthermore, we provide useful expressions for the sensitivity of interest rate risk measures to changes in term structure shape parameters.
|Date of creation:||2005|
|Contact details of provider:|| Postal: Largo dos Colegiais 2, 7000 - 803ÉVORA|
Phone: + 351 266 74 08 94
Fax: + 351 266 74 24 94
Web page: http://www.decon.uevora.pt
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:evo:wpecon:19_2005. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Aurora Murcho Galego)
If references are entirely missing, you can add them using this form.