Maraging non-parallel shift risk of yield curve

Abstract

Among specific assumptions of immunization theory formalized by Fisher and Weil(1971), the assumption that interest rates can only change by a parallel shift has been one of the most disputable subjects in the fixed-income portfolio management field. In fact, the yield curve rarely moves in a parallel fashion even on the infinitesimal level. When the strategies that are based on the assumption of parallel shift of yield curve fail to be effective, often it is because the yield curve does not shift in a parallel fashion. Hence, when an immunization strategy is to be efficient, various sources of uncertainty in the yield curve change must be considered. According to this reason, this study generalizes the one-factor model of yield curve change into two or more factor models. Under these generalized multi-factor model of yield curve change a hedhing strategy is suggested and its performance is compared with that of traditional strategy. In chapter II, two factor model of yield curve movement which allows both parallel shift and slope change of the curve is assumed. A spread position between treasury bill futures and treasury bond futures is used to hedge the risk of slope change of the yield curve. Chapter III employs n-factor model developed by Ho(1992) which is called as key rate model of yield curve. In the key rate model, the traditional convexity of a bond is extended to a Hessian matrix which determines a hypersurface of key ratesxbond price space. This study calls the hypersurface as a convexity surface and the Hessian matrix as a convexity surface matrix. The convexity surface matrix has several advantages over the traditional convexity which is a scalar. First, the traditional convexity measure can be decomposed into several components which are attributable to each segment of the yield curve. Second, the convexity surface can represent the effect of an interactive relationship among the shifts of key rates that the traditional convexity fails to capture....