How to find a bond portfolio with the highest convexityin a class of fixed duration portfolios

• Autorzy: Zaremba L.S. , Smoleński W.H.
• Języki publikacji: EN

Abstrakty

EN

The paper extends the main result of [1], that is, the construction of a K-immunization strategy with the highest convexity to a more general setting by dropping the key assumption of [1] stating that interest rate shocks ht to occur in a near future are proportional to the values of spot rates Yt plus 1, e.g. the condition (4) holds. Here, the interest rate shifts ht are allowed to be of the more general type (1) with known (to an investor) coefficients gt'S (usually estimated empirically based on historical data). The optimal portfolio Z* is found here by means of the K - T conditions. If the convexity of Z* exceeds that of any single payment at time when the liability has to be discharged, then Z* appears to be also the best K-immunization strategy yielding the maximal unanticipated rate of return due to shocks in spot rates.

Słowa kluczowe

EN

convexity; duration; immunization; unanticipated rate of return

• Wydawca: Polska Akademia Nauk, Wydział IV Nauk Technicznych
• Czasopismo: Bulletin of the Polish Academy of Sciences. Technical Sciences
• Rocznik: 2000
• Tom: Vol. 48, nr 2
• Strony: 279--286
• Opis fizyczny: Bibliogr. 6 poz.

Twórcy

autor

Zaremba L.S.

autor

Smoleński W.H.

• System Research Institute, Polish Academy of Sciences, Newelska 6, 01-447 Warsaw, Poland

Bibliografia

• [1] L. S. Zaremba, Construction of a K-immunization strategy with the highest convexity, Control & Cybernetics, 29 (1998) 135-145.
• [2] L. S. Zaremba, W. Smoleński, Optimal portfolio choice under a liability constraint, Annals of Operation Research, to appear.
• [3] L. S. Zaremba, Solution of immunization problem in case of proportional spot rate shifts, WP-3-1995, Systems Research Institute, Polish Academy of Sciences, Warsaw 1995.
• [4] F. Maculay, Some theoretical problems suggested by the movements of interest rates, bond yields and stock prices in the US since 1856, National Bureau of Economic Rsch., New York 1938.
• [5] F. Redingt on, Review of the principles of life-office valuations, J. Of the Inst. of Actuaries, 3 (1952) 286-315.
• [6] L. Fisher, R. Weil, Coping with the risk of interest rate fluctuations returns to bond holders from naive and optimal strategies, J. Business, 44 (1971) 408-431.