Immunization Using a Parametric Model of the Term Structure

Jorge Bravo and Carlos Manuel Pereira da Silva
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Carlos Manuel Pereira da Silva: ISEG - School of Economics and Management, Technical University of Lisbon

Economics Working Papers from University of Évora, Department of Economics (Portugal)

Abstract: 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.

Keywords: Immunization; duration; parametric model; interest rate risk (search for similar items in EconPapers)
JEL-codes: E43 G11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005
New Economics Papers: this item is included in nep-fin, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:evo:wpecon:19_2005

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