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Closed-Form Solutions of Convexity and M-Square
Sanjay Nawalkha University of Massachusetts at Amherst - Eugene M. Isenberg School of Management Nelson Lacey University of Massachusetts at Amherst Thomas Schneeweis University of Massachusetts at Amherst - Eugene M. Isenberg School of Management January 23, 1990 Abstract: Closed-form formulas for Macaulay duration, as given by Babcock and Chua, provide the user with a less cumbersome and more efficient procedure for calculating duration. Recent developments, however, have suggested alternative measures of bond portfolio immunization designed to overcome the severe restrictions that Macaulay duration places on permitted interest rate behavior. This note presents closed-form formulas for two such alternative measures - convexity and M-square and demonstrates how these measures can be used in an immunization strategy.
Keywords: bond convexity, M-square, interest rates, immunization, interest rate risk JEL Classifications: G10, G11, G12, G13, G21, G22, G23 Working Paper SeriesDate posted: May 23, 2009 ; Last revised: May 23, 2009Suggested CitationContact Information
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