Bond Portfolio Immunization: Tests of Maturity, One- and Two-Factor Duration Matching Strategies

G O Bierwag, George G Kaufman and Cynthia M Latta

The Financial Review, 1987, vol. 22, issue 2, 203-19

Abstract: This paper provides additional evidence on the usefulness of duration as a strategy tool by developing a two-factor duration model and by using a reasonably reliable database to compare empirically the relative performance of maturity, one-factor duration, and two- factor duration matching strategies in immunizing portfolios of default-free and option-free bonds against interest-rate risk. The results suggest that, on average, duration models, even for arbitrarily assumed simple stochastic processes, are more accurate than maturity models and that increased accuracy may be achieved by increasing the length of the planning period and the number of factors in the model. Copyright 1987 by MIT Press.

Date: 1987
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