(A) study on the dynamic immunization strategy of bond portfolio management

Abstract

In the bond investment management, immunization strategy has been said that it can earn at least the promised return in spite of the uncertain interest rate change. But this strategy assumes an unrealistic interest rate change so that the immunization effect is insufficient. This thesis extends this classical immunization strategy to a dynamic immunization effect. We develop a strategy and prove it mathematically. The dynamic immunization strategy is also tested in the Korea bond market from 1977 to 1982. The transaction cost is also considered in this empirical study. It is shown that the dynamic immunization strategy is superior to the buy and hold strategy and the classical immunization strategy by comparing the realized returns of each strategy. The dynamic immunization strategy earns higher average return with lower volatility even though we consider a transaction cost.