The Immunization Performance of Traditional and Stochastic Durations: A Mean-Variance Analysis
33 Pages Posted: 20 Dec 2007 Last revised: 12 Dec 2016
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
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