Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-15T15:57:59.973Z Has data issue: false hasContentIssue false
  • English
  • Français

Immunizing Default-Free Bond Portfolios with a Duration Vector

Published online by Cambridge University Press:  06 April 2009

Donald R. Chambers ,
Willard T. Carleton  and
Richard W. McEnally
Get access Rights & Permissions [Opens in a new window]

Abstract

Dissatisfaction occasionally has been expressed with traditional measures of duration for immunization on conceptual grounds. However, more elegant duration measures have not been found to be superior to the traditional ones in empirical tests of immunization efficacy. Under the assumption that the term structure of continuously compounded interest rates can be expressed as a polynomial, Chambers and Carleton (1981) demonstrate that the finite and noninstantaneous return of a default-free bond can be expressed as a vector product of a duration vector and a shift vector. This study derives immunization strategies from the model and tests them. The results of the portfolio tests indicate that the traditional duration approach of Macaulay provides enhanced immunization relative to maturity approaches or naive approaches. However, the duration vector approach produces further improvements.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 1 , March 1988 , pp. 89 - 104
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bierwag, G. O.; Kaufman, G. C.; and Khang, C.. “Duration and Bond Portfolio Analysis: An Overview.” Journal of Financial and Quantitative Analysis, 13 (11 1978), 671–685.CrossRefGoogle Scholar
Bierwag, G. O.; Kaufman, G. C.; Schweitzer, R.; and Toevs, A.. “The Art of Risk Management in Bond Portfolios.” Journal of Portfolio Management, 7 (Spring 1981), 27–36.Google Scholar
Brennan, M. J., and Schwartz, E. S.. “Conditional Predictions of Bond Prices and Returns.” Journal of Finance, 35 (05 1980), 405–417.CrossRefGoogle Scholar
Brennan, M. J., and Schwartz, E. S.. “Duration, Bond Pricing, and Portfolio Management.” In Innovations in Bond Portfolio Management: Duration Analysis and Immunization, Bierwag, G. O., Kaufman, G. C., and Toevs, A., eds. JAI Press, Contemporary Studies in Economics and Financial Analysis, 14 (1983).Google Scholar
Carleton, W. T. “Discussion: Duration and Security Risk.” Journal of Financial and Quantitative Analysis, 13 (11 1978), 669–670.CrossRefGoogle Scholar
Chambers, D. R. “The Management of Default-free Bond Portfolios.” Unpubl. Ph.D. diss., the Univ. of North Carolina at Chapel Hill (1981).Google Scholar
Chambers, D. R., and Carleton, W. T.. “A More General Duration Approach.” In Research in Finance, Chen, A. H., ed., JAI Press, 7 (forthcoming).Google Scholar
Chambers, D. R.; Carleton, W. T.; and Waldman, D. M.. “Estimation of the Term Structure of Interest Rates Using a Simple Polynomial.” Journal of Financial and Quantitative Analysis, 19 (09 1984), 233–252.CrossRefGoogle Scholar
Cooper, I. A. “Asset Values, Interest Rate Changes, and Duration.” Journal of Financial and Quantitative Analysis, 12 (12 1977), 701–723.CrossRefGoogle Scholar
Fisher, L., and Weil, R. L.. “Coping with the Risk of Interest Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies.” Journal of Business, 44 (10 1971), 408–431.CrossRefGoogle Scholar
Gultekin, G. R., and Ragalski, R. J.. “Alternative Duration Specifications and the Measurement of Basic Risk: Empirical Tests.” Journal of Business, 57 (10 1985), 241–264.CrossRefGoogle Scholar
Livingston, M. “Measuring Bond Price Volatility.’ Journal of Financial and Quantitative Analysis, 14 (06 1979), 343–349.CrossRefGoogle Scholar
Macaulay, F. R.Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields, and Stock Prices in the U.S. since 1856. New York: National Bureau of Economic Research (1938).Google Scholar
Nelson, J., and Schaefer, S.. “The Dynamics of the Term Structure and Alternative Portfolio Immunization Strategies.” In Innovations in Bond Portfolio Management: Duration Analysis and Immunization, Kaufman, G. C., Bierwag, G. O., and Toevs, A., eds. JAI Press, Contemporary Studies in Economics and Financial Analysis, 14 (1983).Google Scholar
Redington, F. M. “Review of the Principles of Life-Office Valuations.’ Journal of the Institute of Actuaries, 78 (1952), 286–315.CrossRefGoogle Scholar
Vanderhoof, I. T. “The Interest Rate Assumptions and the Maturity Structure of the Assets of a Life Insurance Company.’ Transactions of the Society of Actuaries, 24 (1972), 157–192.Google Scholar