Immunization using a stochastic-process independent multi-factor model: The Portuguese experience

In this paper, we evaluate the relative immunization performance of the M-vector proposed by Nawalkha and Chambers (1997) [Nawalkha, S.K., Chambers, D.R., 1997. The M-vector model: derivation and testing of extensions to M-squared. The Journal of Portfolio Management 23, 92-98], using data for the Portuguese government debt market. Empirical results show that: (i) immunization models (single- and multi-factor) remove most of the interest rate risk underlying a more naïve maturity strategy; (ii) duration-matching portfolios constrained to include the maturity bond and formed using a single-factor model provide the best immunization performance overall, particularly in highly volatile term structure environments and shorter holding periods; (iii) varying the rebalancing frequency and the investment horizon shows that these results are less robust for Portugal than for other countries.