Immunization Derived from a Polynomial Duration Vector in the Spanish Bond Market
Posted: 16 May 2007
This paper focuses on the Spanish government debt market in an attempt to evaluate the immunization performance of the polynomial duration model of Chambers and Carleton (Chambers, D.R., Carleton, W.T., 1988. A generalized approach to duration. In: Chen, A.H. (Ed.), Research in Finance, vol. 7, JAI Press, Greenwich, pp. 163-181), in default-free and option-free fixed-income portfolios and to ascertain whether traditional convexity is an earnings-generating element. Empirical tests show that three constraints, namely those related to the level, slope and curvature of term structure shifts, are necessary to guarantee a return close to the target. The only exception to this rule is found in portfolios including an asset that matures near the horizon date, in which classical immunization performs properly.
Keywords: Immunization, Duration, Convexity, Portfolio management, Term structure
JEL Classification: E43, G11
Suggested Citation: Suggested Citation