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Immunizing Default-Free Bond Portfolios with a Duration Vector

Donald R. Chambers, Willard T. Carleton and Richard W. McEnally
The Journal of Financial and Quantitative Analysis
Vol. 23, No. 1 (Mar., 1988), pp. 89-104
DOI: 10.2307/2331026
Stable URL: http://www.jstor.org/stable/2331026
Page Count: 16
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Immunizing Default-Free Bond Portfolios with a Duration Vector
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Abstract

Dissatisfaction occasionally has been expressed with traditional measures of duration for immunization on conceptual grounds. However, more elegant duration measures have not been found to be superior to the traditional ones in empirical tests of immunization efficacy. Under the assumption that the term structure of continuously compounded interest rates can be expressed as a polynomial, Chambers and Carleton (1981) demonstrate that the finite and noninstantaneous return of a default-free bond can be expressed as a vector product of a duration vector and a shift vector. This study derives immunization strategies from the model and tests them. The results of the portfolio tests indicate that the traditional duration approach of Macaulay provides enhanced immunization relative to maturity approaches or naive approaches. However, the duration vector approach produces further improvements.

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