Minimum Variance Immunization
59 Pages Posted: 12 Jan 2021
Date Written: November 25, 2020
This paper analyzes immunization strategies in the mean-variance framework. We characterize the efficient portfolio allocations and identify the minimum variance immunization strategy. We show that the efficient allocations can be superior or inferior to the minimum variance allocation as time passes. Consequently, the efficiency of duration-based (Macaulay or stochastic) immunization strategies can be transient, which helps explain their mitigated performance documented in empirical studies. The minimum variance immunization strategy, characterized explicitly in the Vasicek model, appears robust to real yield curve fluctuations extrapolated from U.S. data from 1977 to 2020.
Keywords: Immunization, Mean-variance, Duration, Risk management
JEL Classification: G10, G11
Suggested Citation: Suggested Citation