Title: The immunisation performance of minimum M-square portfolios

Authors: Senay Agca

Addresses: Department of Finance, George Washington University, 2201 G Street NW, Funger Hall 505, Washington, DC 20052, USA

Abstract: We examine the immunisation performance of minimum M-square portfolios using a Monte-Carlo simulation in which interest rates evolve according to an exponentially decaying volatility Heath–Jarrow–Morton (1992) model. We consider both duration, and duration and convexity matching immunisation strategies. Our results show that the immunisation performance of minimum M-square portfolios is very sensitive to the holding period. Minimum M-square portfolios have the best performance for short holding periods. However, all minimum M-square portfolios have good immunisation performance irrespective of the risk measure used, especially with duration and convexity matching strategies.

Keywords: immunisation performance; minimum M-square portfolios; Monte-Carlo simulation; revenue management; immunisation strategies; holding periods; interest rate changes; portfolio formation.

DOI: 10.1504/IJRM.2007.015537

International Journal of Revenue Management, 2007 Vol.1 No.4, pp.327 - 345

Published online: 26 Oct 2007 *

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