The Duration Derby: A Comparison of Duration Based Strategies in Asset Liability Management

21 Pages Posted: 13 Apr 2001

See all articles by Harry Zheng

Harry Zheng

Imperial College London - Mathematical Finance

Lyn C. Thomas

University of Southampton - School of Management

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Multiple version iconThere are 2 versions of this paper

Date Written: undated

Abstract

Macaulay duration matched strategy is a key tool in bond portfolio immunization. It is well known that if term structures are not flat or changes are not parallel, then Macaulay duration matched portfolio can not guarantee adequate immunization. In this paper the approximate duration is proposed to measure the bond price sensitivity to changes of interest rates of non-flat term structures. Its performance in immunization is compared with those of Macaulay, partial and key rate durations using the US Treasury STRIPS and Bond data. Approximate duration turns out to be a possible contender in asset liability management: it does not assume any particular structures or patterns of changes of interest rates, it does not need short selling of bonds, and it is easy to set up and rebalance the optimal portfolio with linear programming.

Keywords: Portfolio choice, asset pricing, computational techniques, duration analysis

JEL Classification: G11, G12, C63, C41

Suggested Citation

Zheng, Harry and Thomas, Lyn C. and Allen, David Edmund, The Duration Derby: A Comparison of Duration Based Strategies in Asset Liability Management (undated). Available at SSRN: https://ssrn.com/abstract=266690 or http://dx.doi.org/10.2139/ssrn.266690

Harry Zheng

Imperial College London - Mathematical Finance ( email )

United Kingdom

Lyn C. Thomas

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom
(023) 8059 7718 (Phone)
(023) 8059 3844 (Fax)

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

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