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Bond portfolio inmunization, inmunization risk and idiosyncratic risk
Antonio Díaz and María de la O González and Eliseo Navarro |
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Classical immunization strategies are based on the hypothesis of parallel term structure changes. So, a different term structure behaviour may affect the effectiveness of immunization. This is known as immunization risk. Previous literature suggests that bullet portfolios allow this risk to be reduced. However, investing in bullet portfolios implies to build up portfolios consisting of only one or two assets and so assuming a high degree of idiosyncratic risk. So, it seems to be some sort of trade off between immunization and idiosyncratic risks. In this paper we develop a set of strategies with different degrees of these two sources of risk and the main outcome is that diversification is the most effective strategy to achieve the objective of immunization, in opposition to previous results where bullet portfolios were considered the optimal strategies against interest rate risk. This result may be a consequence of more realistic hypothesis introduced in the model as well as the fact of using daily prices of actual transactions. The period covered by this study ranges from January 1993 through January 2003 using data from the Spanish Public Debt Market.
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