 Immunizing a Marked-to-Model Obligation with Marked-to-Market Financial InstrumentsHSE Working papers from National Research University Higher School of Economics Abstract: The traditional bond portfolio immunization problem statement assumes that both the obligation and the immunizing portfolio belong to the same liquidity class, i.e. both are valued either at their respective observed market prices (mark-to-market) or via the sum of discounted cash flows (mark-to-model). However, it is customary to hedge an obligation for which there is no liquid market with relatively liquid market instruments. We propose a new problem formulation, where the obligation is marked to a model via discounted cash flows while the immunizing portfolio is marked to the market via real observed prices. We solve the immunization problem in this new formulation and test the performance of its solution. The new approach performs better within the new problem formulation while the traditional approach performs better within the classical problem formulation. The differences are more pronounced if the number of actively traded bonds is small. Keywords: immunization; mark-to-market; mark-to-model; empirical test; bond portfolio (search for similar items in EconPapers) Published in WP BRP Series: Financial Economics / FE, November 2021, pages - 18 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:84/fe/2021 Access Statistics for this paper More papers in HSE Working papers from National Research University Higher School of Economics |
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