Immunization Theory: An Actuarial Perspective on Asset-Liability Management

Massimo De Felice
Additional contact information
Massimo De Felice: University of Rome “La Sapienza”

A chapter in Financial Risk in Insurance, 2000, pp 63-85 from Springer

Abstract: Abstract Actuarial Traditions. The management of interest rate risk is a problem with deep roots in the actuarial literature. The results by Redington (1952) and by Haynes and Kirton (1952) may be considered path-breaking on a problem that, even then, “for many years must have intrigued so many actuaries”1. The purpose of their work is to analyse the financial structure of a life office and, in particular, the relationship between the assets and liabilities of a life assurance fund. The specific problem is how to determine the allocation of assets to make them, as far as possible, equally as vulnerable as the liabilities to those influences (typically the effects of fluctuations in the market rate of interest) which affect both. Redington adopts the word “immunization, to signify the investment of the assets in such a way that the existing business is immune to a general change in the rate of interest”2. Haynes and Kirton use the word “insulation” in a similar way. It is remarkable to consider how closely both the authors agreed in their fundamental conclusions. But it is also relevant, for critical purpose and for the sake of theory, to remark the difference in the approach to the problem: Haynes and Kirton paper “dealt primarily with matching, valuation being a by-product”, while Redington’s paper “dealt primarily with valuation, matching being a by-product”3. The first approach led to the development of strategies for cash-flow matching4. The second, which the present paper is concerned with, recognizes the central role of bond pricing theory and of models of the term structure of interest rates, which have undergone a strong development in the last twenty years.

Keywords: Interest Rate; Term Structure; Efficient Frontier; Portfolio Selection Problem; Interest Rate Risk (search for similar items in EconPapers)
Date: 2000
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-57846-5_4

Ordering information: This item can be ordered from
http://www.springer.com/9783642578465

DOI: 10.1007/978-3-642-57846-5_4

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().