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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
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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

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