Tips, the Dual Duration, and the Pension Plan

Posted: 21 Nov 2004

See all articles by Laurence B. Siegel

Laurence B. Siegel

CFA Institute Research Foundation; Ford Foundation

M. Barton Waring

Barclays Global Investors - Client Advisory Group

Abstract

By defining duration as the sensitivity of an asset's price to changes in some other variable, one may characterize any asset as having an inflation duration, Di, and a real-interest-rate duration, Dr. Unlike nominal bonds, for which Di = Dr, inflation-linked bonds, such as Treasury Inflation-Indexed Securities (commonly called TIPS), have different values for Di and Dr. Defined-benefit pension liabilities also have different values for Di and Dr. Such liabilities can be modeled as bonds (or portfolios of bonds and equities or other assets) held short. Thus, by appropriately combining TIPS and nominal bonds, a manager can build a portfolio that has the same inflation duration and real-interest-rate duration as the liability stream. Equities also have different values for Di and Dr, so the interaction of equities with TIPS and nominal bonds can be exploited in forming efficient pension portfolios-particularly in defeasing various liability streams.

Keywords: Portfolio Management: Asset Allocation, Asset/Liability Management, Debt Strategies; Debt Investments: Other

Suggested Citation

Siegel, Laurence B. and Waring, M. Barton, Tips, the Dual Duration, and the Pension Plan. Financial Analysts Journal, Vol. 60, No. 5, pp. 52-64, September/October 2004. Available at SSRN: https://ssrn.com/abstract=614509

Laurence B. Siegel

CFA Institute Research Foundation ( email )

United States

Ford Foundation ( email )

320 East 43rd Street
New York, NY 10017
United States

M. Barton Waring (Contact Author)

Barclays Global Investors - Client Advisory Group ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,952
PlumX Metrics