Duration Models and IRR Management : A Question of Dimensions?

This paper compares the immunization performance of alternative single and multiple factor duration models, using Spanish government bond data, over 1, 2 and 3-year horizons. The aim is to assess whether the success of duration-matching strategies is primarily attributable to the particular model chosen or to the number of risk factors considered. Empirical tests show that: (i) traditional immunization is easily bettered by more realistic strategies; (ii) the number of risk factors considered has a greater influence on the result than the particular model chosen; and (iii) three-factor immunization strategies offer the highest immunization benchmarks