Arbitrage opportunities and immunization

Joel Barber and Mark Copper ()

Journal of Economics and Finance, 2006, vol. 30, issue 1, 133-139

Abstract: It is often argued that an immunization strategy violates arbitrage-free equilibrium. Because immunization is a static concept, we contend that this argument is not valid. This paper examines the immunization strategy in a dynamic setting, and shows that global immunization is feasible for any arbitrage-free affine term structure model, including the parallel shift model. Further, we show that immunization does not violate arbitrage-free pricing because the cost of immunization over time is positive. Consequently, immunization strategies based upon commonly used duration, measures are not theoretically unsound. Copyright Academy of Economics and Finance 2006

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:spr:jecfin:v:30:y:2006:i:1:p:133-139

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DOI: 10.1007/BF02834280

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