The performance of deterministic and stochastic interest rate risk measures

Luís Oliveira (), João Vidal Nunes () and Luís Malcato ()

Portuguese Economic Journal, 2014, vol. 13, issue 3, 165 pages

Abstract: The efficiency of traditional and stochastic interest rate risk measures is compared under one-, two-, and three-factor no-arbitrage Gauss-Markov term structure models, and for different immunization periods. The empirical analysis, run on the German Treasury bond market from January 2000 to December 2010, suggests that: i) Stochastic interest rate risk measures provide better portfolio immunization than the Fisher-Weil duration; and ii) The superiority of the stochastic risk measures is more evident for multi-factor models and for longer investment horizons. These findings are supported by a first-order stochastic dominance analysis, and are robust against yield curve estimation errors. Copyright ISEG 2014

Keywords: Interest rate risk; Asset-liability management; Immunization strategies; Stochastic duration; Stochastic dominance; G11; G12; G20; C15; E43 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:portec:v:13:y:2014:i:3:p:141-165

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DOI: 10.1007/s10258-014-0104-8

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