Bond immunization strategy: An Indian perspective

Abstract

Traditionally, duration based strategies are used to immunize the debt securities. Macaulay and Fisher-Weil Duration measure provide effective immunization against parallel shift in the term structure. Any shift other than parallel shift will affect the immunization of the debt securities portfolio. This risk is called immunization risk. Many advanced duration measures, such as M-square and M-absolute measure, have been used to provide effective immunization against general shift in the term structure. Application of these duration calls for investment in bullet portfolio which increases the diversification risk. Hence, there is trade-off between immunization risk and diversification risk. A mix strategy using, M-absolute duration and fisher-Weil duration measure, has been employed to test the effective for Indian corporate bonds. For the sample period, it is observed that diversification strategies are helpful in reducing immunization risk.