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| Author: | Balbas, A. Ibañez, A. |
| Title: | When can you immunize a bond portfolio ? |
| Journal: | Journal of Banking and Finance
1998 : DEC, VOL. 22:12, p. 1571-1595 |
| Index terms: | Portfolio management Bonds Assets Prices Models |
| Language: | eng |
| Abstract: | The 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. This lemma is applied 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 assumed? 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, new strategy of immunization is presented that consists in matching duration and minimizing a new linear dispersion measure of immunization risk. |
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