Dynamic immunisation does not imply cash flow matching: a hard application to Spain

Abstract

Immunisation is not a static strategy as the literature affirms: we argue that the conditions established for reaching immunisation are unbalanced in themselves as times go on. This paper presents a valid, comprehensive strategy with all the conditions and assumptions made. It is checked in the Spanish debt market with data from 2004 to 2013 using some immunised portfolios preset following these conditions so that there is no rebalancing. The authors find a strategy that eliminates the requirement of rebalancing because of time passing or due to the mere parallel shift of interest rates regarding the yields that should have been obtained under the hypothesis of the rational expectations theory.

Towards an immunization perfect model?

“…It is mathematically difficult using coupon bonds to be certain of a guaranteed match of liabilities because of reinvestment risk, credit risk and low interest rates (Beer & Gnan, 2015; Focarelli, 2015). As it can be seen on the Spanish market in recent years (Figure 1), TSIR comprise more than 88% of interest rate changes (Litterman & Scheinkman, 1991; Soto, 2001) and have been used to test immunization strategies in situations of acute economic crisis (De La Peña et al, 2017).…”

“…TSIR or Spot rates in Spain in the last years. Source : De La Peña, Garayeta, and Iturricastillo (2017) and Bank of Spain…”