Abstract

References (6)

Beta

Citations (7)

Beta

Download | Share | Email | Add to Briefcase | Buy Hard Copy

An Improved Immunization Strategy: M-Absolute

Sanjay Nawalkha
University of Massachusetts at Amherst - Eugene M. Isenberg School of Management

Donald R. Chambers
Lafayette College - College of Economics and Business

January, 30 2009

Abstract:
The traditional duration model has limited power for protecting against interest rate risk. A new risk measure, entitled M-Absolute, is designed to provide powerful and practical single-risk-measure immunization in particular circumstances. M-Absolute is similar to M-Square but is derived as a first-order interest-rate-risk hedging model. M-Absolute of a bond is defined as the weighted average of the absolute distances of the bond's cash flows from a horizon point. Even though it is a single-risk measure, M-Absolute can act effectively to reduce the impacts of several types of interest rate risks rather than hedge against only a single type of term structure shift. Empirical tests show that M-Absolute reduces the interest rate risk inherent in the traditional duration model by more than half. These results are independent of the particular time period chosen.

Keywords: Duration, Convexity, M-Absolute, M-Square, Interest Rate Risk, Hedging

JEL Classifications: G11, G12, G13, G21, G22, G23, G24

Working Paper Series

Date posted: January 30, 2009 ; Last revised: May 12, 2009

Suggested Citation

Nawalkha, Sanjay and Chambers, Donald R., An Improved Immunization Strategy: M-Absolute (January, 30 2009). Available at SSRN: http://ssrn.com/abstract=1335638

Export to: Export Citation What's this?

Contact Information

Sanjay Nawalkha (Contact Author) University of Massachusetts at Amherst - Eugene M. Isenberg School of Management ( email ) Amherst, MA 01003-4910 United States 413-687-2561 (Phone)
Donald R. Chambers Lafayette College - College of Economics and Business ( email ) Easton, PA 18042 United States 610-330-5303 (Phone) 610-330-8961 (Fax)