Bond immunization for additive interest rate shocks

Barber, Joel R.; Copper, Mark L.

doi:10.1007/bf02771478

Cited by 5 publications

(4 citation statements)

References 9 publications

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“…Similar to Barber and Copper (1998) and Kaluszka and Kondratiuk-Janyska (2004), to ensure that we are able to comply with every yearly payment, we decompose the overall liability into subsets of single liabilities and immunize 1 H of the overall portfolio against each upcoming payment. This means, for instance, that for the 3-year and 5-year investment horizons considered each sub-portfolio will comprise, respectively, 1 3 or 1 5 of the overall portfolio value.…”

Section: Portfolio Design and Testing Methodologymentioning

confidence: 99%

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Simões

Oliveira

Bravo

2021

Risks

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Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies.

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Section: Portfolio Design and Testing Methodologymentioning

confidence: 99%

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Simões

Oliveira

Bravo

2021

Risks

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“…For example, Bierwag (1977) developed measures of duration to immunize a portfolio given a multiplicative shock to the term structure. Barber and Copper (1998) provide immunization models that allow for nonparallel additive shifts in the term structure, such as long-term rates changing differently from short-term rates. Bierwag et al (1983) note that the success of an immunizing strategy depends on whether the assumed stochastic term structure process is correct.…”

Section: A Brief Review Of Related Literaturementioning

confidence: 99%

Creating a synthetic after-tax zero-coupon bond using US Treasury STRIP bonds: implications for the true after-tax spot rate

Daves

Ehrhardt

2011

Applied Financial Economics

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For an individual or company that is subject to taxes, we develop a method that uses laddered Separate Trading of Registered Interest and Principal (STRIP) bonds to determine the value (and composition) of a portfolio that replicates a risk-free after-tax cash flow that will occur on a single future date. In contrast to previous approaches, our method does not require rebalancing or short sales. In addition, we show that the standard after-tax risk-free spot rate, defined as the after-tax yield on a US Treasury STRIP bond, is correct only for a flat-term structure. Using our method, we provide a true measure of the after-tax risk-free spot rate that applies to any term structure.

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“…Starting with Fisher and Weil (1971), the development of techniques to address non-parallel yield curve shifts led to the recognition of a connection between immunization strategy specification and the type of assumed shocks, e.g., Bierwag and Khang (1979), Fong and Vasicek (1984), Chambers et al (1988), Barber and Copper (1998). Sophisticated risk measures, such as M 2 and M-absolute, were developed to select the best duration matching portfolio from the set of potential portfolios, e.g., Nawalkha and Chambers (1996).…”

Section: Background Literaturementioning

confidence: 99%

“…Polynomial duration models fit yield curve movements using a polynomial function of the terms to maturity, e.g., Crack and Nawalkha (2000), Soto (2001), or the distance between the terms to maturity and the planning horizon, e.g., Nawalkha et al (2003). Directional duration models identify general risk factors using data reduction techniques such as principal components to capture the empirical yield curve behavior, e.g., Elton et al (1990), Barber and Copper (1998), Hill and Vaysman (1998), Navarro and Nave (2001). Key rate duration models decompose the yield curve into number of linear segments based on the selection of key rates, e.g., Ho (1992), Dattatreya and Fabozzi (1995), Phoa and Shearer (1997).…”

Section: Background Literaturementioning

confidence: 99%

Partial Immunization Bounds and Non-Parallel Term Structure Shifts

Poitras

2013

Ann. Finan. Econ.

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A variety of approaches have been proposed to extend classical fixed income portfolio immunization theory to cases where shifts in the term structure are not parallel. Following Reitano (1991a, 1991b, 1992, 1996) and Poitras (2007), this paper uses partial durations and convexities to specify benchmark partial immunization bounds for non-parallel term structure shifts. Theoretical results are obtained by exploiting properties of the multivariate Taylor series expansion of the spot interest rate pricing function. It is demonstrated that the partial immunization bounds can be effectively manipulated by adequate selection of the securities being used to immunize the portfolio. The inclusion of time values permits the results obtained to be related to previous studies by Christensen and Sorensen (1994), Chance and Jordan (1996), Barber and Copper (1997) and Poitras (2005, Ch. 5) on the time value-convexity tradeoff.

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Bond immunization for additive interest rate shocks

Cited by 5 publications

References 9 publications

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Creating a synthetic after-tax zero-coupon bond using US Treasury STRIP bonds: implications for the true after-tax spot rate

Partial Immunization Bounds and Non-Parallel Term Structure Shifts

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