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A risk hedging strategy under the nonparallel-shift yield curve

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  • Gong, Pu
  • He, Xubiao

Abstract

Under the assumption of the movement of rigid, a nonparallel-shift model in the term structure of interest rates is developed by introducing Fisher & Weil duration which is a well-known concept in the area of interest risk management. This paper has studied the hedge and replication for portfolio immunization to minimize the risk exposure. Throughout the experiment of numerical simulation, the risk exposures of the portfolio under the different risk hedging strategies are quantitatively evaluated by the method of value at risk (VaR) order statistics (OS) estimation. The results show that the risk hedging strategy proposed in this paper is very effective for the interest risk management of the default-free bond.

Suggested Citation

  • Gong, Pu & He, Xubiao, 2005. "A risk hedging strategy under the nonparallel-shift yield curve," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 354(C), pages 450-462.
    • Handle: RePEc:eee:phsmap:v:354:y:2005:i:c:p:450-462
    DOI: 10.1016/j.physa.2005.01.031
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    References listed on IDEAS

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    1. Cooper, I. A., 1977. "Asset Values, Interest-Rate Changes, and Duration," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(5), pages 701-723, December.
    2. Kaplanski, Guy & Kroll, Yoram, 2002. "VaR Risk Measures versus Traditional Risk Measures: an Analysis and Survey," MPRA Paper 80070, University Library of Munich, Germany.
    3. Jeremy Berkowitz & James O'Brien, 2002. "How Accurate Are Value‐at‐Risk Models at Commercial Banks?," Journal of Finance, American Finance Association, vol. 57(3), pages 1093-1111, June.
    4. Soto, Gloria M., 2001. "Immunization derived from a polynomial duration vector in the Spanish bond market," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1037-1057, June.
    5. Barber, Joel R. & Copper, Mark L., 1998. "A minimax risk strategy for portfolio immunization," Insurance: Mathematics and Economics, Elsevier, vol. 23(2), pages 173-177, November.
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