The Mean-variance (in)Efficiency of Duration-based Immunization

58 Pages Posted: 19 Oct 2022

See all articles by Pascal Francois

Pascal Francois

HEC Montreal - Department of Finance

Franck Moraux

Université de Rennes I and CREM

Date Written: October 12, 2022

Abstract

Empirical studies report inconclusive assessment of duration-based immunization, notably showing that more sophisticated strategies do not outperform immunization relying on Macaulay duration. This paper provides a mean-variance framework to explore this puzzle. We characterize the efficient portfolio allocations for a stylized barbell strategy which trades off reinvestment risk with discounting risk. We show, in a model-free setting, that efficient allocations can be superior or inferior to the minimum variance allocation as time passes, meaning the efficiency of duration-based immunization strategies is transient. This result is numerically illustrated in a one-factor Gaussian model as well as in a two-factor non-Gaussian model. Using yield curve scenarios resampled from U.S. data over the 1977-2020 period, we further challenge our conclusions non-parametrically, and find that duration-based immunization entails allocations that are sometimes inefficient.

Keywords: Immunization, Bond portfolio, Mean-variance, Duration, Risk management

JEL Classification: G10, G11

Suggested Citation

Francois, Pascal and Moraux, Franck, The Mean-variance (in)Efficiency of Duration-based Immunization (October 12, 2022). Available at SSRN: https://ssrn.com/abstract=4245994 or http://dx.doi.org/10.2139/ssrn.4245994

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)

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/

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