Models of financial immunization and duration measures

Resumen

Financial immunization is a passive management strategy for portfolios comprising fixed income financial assets that aims to eliminate from such portfolios any risk arising from uncertainty concerning the future performance of interest rates. The initial basis for such strategies was the measure of duration introduced by F. Macaulay in 1938. In view of the limitations of the immunization model based on this measure, and in a bid to achieve greater interest risk coverage, a number of approaches have led to a good many models being proposed, which may be classified into three groups: Unifactorial models, based on the use of single duration immunization measures. Fisher and Weil (1971), Bierwag (1977), Bierwag and Kaufman (1977), Khang (1979) and Bierwag, Kaufman, Schweitzer and Toevs (1981) have made some important proposals. Models based on dispersal measures. These seek to minimize the dispersal of bond portfolio cash flows in relation to the investment horizon. Particularly interesting proposals include those by Fong and Vasicek (1984) and Nawalkha and Chambers (1996). Multifactorial models based on the simultaneous use of a set of immunizing measures of duration. Major proposals made by Prisman and Shores (1988), Reitano (1991), Klaffky, Ma and Nozari (1992), Ho (1992), Dattatreya and Fabozzi (1995) and Nawalkha and Chambers (1997) The purpose of the paper is to simulate the behavior of different models of financial immunization, based on information concerning the Spanish public debt market, with a view to conducting a comparative analysis.