Duration Models and IRR Management: A Question of Dimensions?

Posted: 14 May 2007

See all articles by Gloria M. Soto

Gloria M. Soto

University of Murcia - Faculty of Business and Economics

Abstract

This paper compares the immunization performance of alternative single and multiple factor duration models, using Spanish government bond data, over 1, 2 and 3-year horizons. The aim is to assess whether the success of duration-matching strategies is primarily attributable to the particular model chosen or to the number of risk factors considered. Empirical tests show that: (i) traditional immunization is easily bettered by more realistic strategies; (ii) the number of risk factors considered has a greater influence on the result than the particular model chosen; and (iii) three-factor immunization strategies offer the highest immunization benchmarks.

Keywords: Immunization, Duration, Interest rate, Risk management, Fixed income

JEL Classification: E43, G11

Suggested Citation

Soto, Gloria M., Duration Models and IRR Management: A Question of Dimensions?. Journal of Banking & Finance, Vol. 28, No. 5, May 2004, Available at SSRN: https://ssrn.com/abstract=985360

Gloria M. Soto (Contact Author)

University of Murcia - Faculty of Business and Economics ( email )

Spain

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