Study On Immunization Strategies Of Treasury's Interest Rate Risk

Immunization is an important tool for interest rate risk management, through which the value of bond portfolio can be protected from fluctuation of interest rate's term structure. Since 1950s, there is great progress on study of immunization strategies and they are widely put into the practice in financial investment and risk management industry. Recently, treasury markets in China are growing fast and interest rate risk are accumulating. However, there is no suitable financial instrument to cover or hedge the risk. At the same time, the risk management toolkit of treasury investors is still poor and the research on immunization strategies in China is in a low stage. Under such background, it is valuable to study this topic and its application in local market, especially during the transition period of interest rate control.Due to the uncertainty of the interest rate risk, statistics and quantitative method are widely employed in the study of immunization strategies, such as optimization method, stochastic process, time series analysis, numeric method, multivariate statistics. A large amount of statistical models are made to forecast and manage interest rate risk. Immunization strategies study has became an important domain of applied statistics. This paper intends to: 1) make deep analysis on the selection of underlying function of multivariate parametric immunization strategies; 2) to explore empirically the potential for improved immunization, using a series of immunization strategies; (3) to determine the appropriate dimension of the vector of interest rate risk measures and discuss the role of portfolio design in protecting fixed income portfolios against non-parallel term structure shifts.This paper shows that the treasury market of SSE is featured with non-parallel term structure shifts. A duration vector up to 3-dimension basically meet the demand of immunization of bond portfolio, among which polynomial parametric duration vector and Vasicek directional duration vector with 2- or 3-dimension perform steadily and best. We show that immunization target should be considered firstly when designing the immunization strategies. Those who take active point adapt to 2-dimension match method, while those who take passive may choose 3-dimension one. There is no certain and positive relationship between convexity and bond extra return and liquidity and investor behavior make great impact on the role of immunization strategies.The paper is structured as followed:In Chapter 1, we describe the background and intention of this paper, make literature review and brief introduction of the main content of this paper.In Chapter 2, we theoretically discuss the methods of bond immunization and analyze their merits and defects in the application. We also deeply discuss the selection of function of multivariate parametric duration and advance a new class of duration, Vasicek directional duration.In Chapter 3, we empirically investigate the risk feature of interest rate in local market of SSE, including estimating the term structure of interest rate, extracting the main factors influencing the term structure shifts, which provides a date base for the next chapter.In Chapter 4, we empirically test the performance of different immunization strategies and determine the appropriate dimension of the vector of interest rate risk measures and discuss the role of portfolio design inprotecting fixed income portfolios against non-parallel term structure shifts. Finally, we advance some guideline on the application of immunization strategies in local market.In Chapter 5, we conclude the paper and make some further research suggestion on immunization strategies.The main academic contributions in the paper include:: 1) Until now, the research on immunization strategies is mainly focused on a specific immunization method, there is no a empirical and comprehensive analysis among methods. We employ transaction data in local market in the paper, which enrich the empirical literature; 2) we advance a new class of duration, Vas...