2009, Vol. 19, Issue 1, an item 6

KONDRATIUK-JANYSKA A., KALUSZKA M., On new immunization strategies under random shocks on the term structure of interest rates

We propose new strategies for portfolio immunization under multiple shocks in the term structure of interest rates (TSIR for short), where a shock is given by the sum of  a polynomial and a random field (see e.g. Kimmel, 2002). General propositions are formulated, but in our example we consider a Brownian sheet. Under different assumptions about shocks in the TSIR, we consider the case of a single liability and develop the approach of portfolio immunization in the case of multiple liabilities, introduced in Kondratiuk-Janyska and Kaluszka (2006). Since different classes of shocks are discussed, it implies different lower bounds on the net value of cash flow (difference between assets and liabilities) at time H (the investor’s planning horizon) when shocks appear. In consequence, immunization strategies are presented with new risk measures, such as e.g. exponential duration.

Keywords: portfolio, immunization, duration, term structure of interest rates, random field