The M-Vector Model: Derivation and Testing of Extensions to M-Square

15 Pages Posted: 12 Apr 2007

See all articles by Sanjay K. Nawalkha

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Donald R. Chambers

Chartered Alternative Investment Analyst Association (CAIA)

Date Written: January 1997

Abstract

This article derives and tests a multiple-factor extension of the M-square model (see Fong and Vasicek [1984] and Fong and Fabozzi [1985]), termed as the M-vector model. Tests of the M-square model indicate that the model reduces the interest rate risk inherent in the traditional duration model by more than half. The M-vector model demonstrates near-perfect hedging performance, eliminating more than 95% of interest rate risk inherent in the traditional duration model.

Keywords: Interest Rate Risk, Duration, Convexity, M-Square, M-Vector, Duration Vector

JEL Classification: G1, G10, G11, G12

Suggested Citation

Nawalkha, Sanjay K. and Chambers, Donald R., The M-Vector Model: Derivation and Testing of Extensions to M-Square (January 1997). Available at SSRN: https://ssrn.com/abstract=979600 or http://dx.doi.org/10.2139/ssrn.979600

Sanjay K. Nawalkha (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-687-2561 (Phone)

Donald R. Chambers

Chartered Alternative Investment Analyst Association (CAIA) ( email )

100 University Drive
Amherst, MA 01002
United States

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