Based On The Covariance-adjusted Duration - Convex Immunization Strategy

It is well known that there are two hypotheses in the simple immunization strategies based on duration and convexity: flat yield curve and paralleled shift. Aiming at the question that the hypotheses are inconsistent with the actual situation in practice, this paper provides a general model of covariance-adjusted duration-convexity immunization by using the idea from Carcano and Foresi (1997) for reference, and analyses the model in the case of hedging portfolios of two assets and three assets. Furthermore, we have tested for the immunity of the general model by employing market data of treasury bonds listed on Shanghai Stock Exchange. The empirical evidences show that the covariance-adjusted duration-convexity immunization approaches outperform the simple duration-convexity techniques.This paper mainly consists 5 chapters:Chapter 1 describes the duration immunization strategy and the duration-convexity immunization in hedging the interest rate risk, and then uses the actual data to explain the localization of the models.Chapter2:some literature summaries, includes the research development on the duration and convexity immunization in the country and the abroad. We summarize the improvement in the simple immunization strategies based on duration and convexity from two lines, the first line: one-factor method, includes: Fisher-Weil duration,directional duration,approximate duration; the second line: many factors method, includes: partial duration,polynomial duration,exponential duration and so on. This paper gives another line: the adjustment method based on the relationship. In the end, we summarize the newly research on the partial Chinese academicians in the interest rate risk immunization strategies during the two years.Chapter 3: we construct a general model of covariance-adjusted duration-convexity immunization to hedge the interest rate risk in the situation that the yield curve doesn't parallel shift and then analyse the model in the case of hedging portfolios of two assets and three assets.Chapter 4:we have tested for the immunity of the general model by employing market data of treasury bonds listed on Shanghai Stock Exchange. First, we employ market data of treasury bonds listed on Shanghai Stock Exchange to estimate the spot rates in different terms; second, we construct the hedging portfolio H which is consisted of different term assets(which yield is the spot rate),and then compute the best weight of the hedeging portfolio using the spot rate which is estimated above; third, we compute the volatility of the immunity portfolio P's unespected yield based on the second step; in the end, we decide which one is better through comparing the volatilities between the covariance-adjusted duration-convexity immunization approaches and the simple duration-convexity techniques.Chapter 5:we summarize this research result, and discuss the revelation from the research result.