The Immunization Performance of Traditional and Stochastic Durations: A Mean-Variance Analysis

33 Pages Posted: 20 Dec 2007 Last revised: 12 Dec 2016

See all articles by Franck Moraux

Franck Moraux

Université de Rennes I and CREM

Pascal Francois

HEC Montreal - Department of Finance

Abstract

This paper provides a mean-variance analysis of immunization strategies that trade off coupon reinvestment risk with resale price risk. For static immunization strategies, neither traditional nor stochastic durations fall in the set of efficient horizons. This finding is robust across various interest rate environments and bond characteristics, and explains the poor immunization results obtained by the comparative study of Gultekin and Rogalski (1984). When dynamic portfolio rebalancing is allowed, traditional and stochastic durations induce efficient strategies with similar performance. We therefore obtain that immunization performance is more driven by strategy sophistication rather than by the choice of duration, which corroborates the empirical finding of Agca (2005). Our results still hold under the two-factor term structure model with stochastic volatility of Longstaff and Schwartz (1992).

Keywords: immunization, traditional duration, stochastic duration, mean-variance framework

JEL Classification: G10, G11

Suggested Citation

Moraux, Franck and Francois, Pascal, The Immunization Performance of Traditional and Stochastic Durations: A Mean-Variance Analysis. Available at SSRN: https://ssrn.com/abstract=1076582 or http://dx.doi.org/10.2139/ssrn.1076582

Franck Moraux

Université de Rennes I and CREM ( email )

IAE de Rennes
11, rue Jean Macé
Rennes, 35000
France
+33 (0)2 23 23 78 08 (Phone)
+33 (0)2 23 23 78 00 (Fax)

HOME PAGE: http://perso.univ-rennes1.fr/franck.moraux/

Pascal Francois (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

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