Duration measures, immunization, and utility maximization

This paper explores the conditions under which a risk averse investor behaves like an immunizer in choosing the maturity structure of a balance sheet. The setting is similar to Grove's study in that the liabilities are assumed fixed but differs in the assumed evolution of interest rates. (M.A....

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Bibliographic Details
Published in:Journal of banking & finance 1993-06, Vol.17 (4), p.689-707
Main Authors: Prisman, Eliezer Z., Tian, Yisong
Format: Article
Language:English
Subjects:
Bond portfolios
Economic models
Economic theory
Financial management
Immunization
Interest rates
Investment policy
Risk aversion
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Summary:This paper explores the conditions under which a risk averse investor behaves like an immunizer in choosing the maturity structure of a balance sheet. The setting is similar to Grove's study in that the liabilities are assumed fixed but differs in the assumed evolution of interest rates. (M.A. Grove, On duration and the optimal maturity structure of the balance sheet, Bell Journal of Economics and Management Science 5 (1974) 696–709.) It transpires that the circumstances under which a risk averse investor behave like an immunizer are not as limited as concluded in Grove's study. The model thus explains the extensive use of immunization by the business community.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(93)90007-Z