Arbitrage opportunities and immunization Article

cited authors

  • Barber, JR; Copper, ML

fiu authors

abstract

  • It is often argued that an immunization strategy violates arbitrage-free equilibrium. Because immunization is a static concept, we contend that this argument is not valid. This paper examines the immunization strategy in a dynamic setting, and shows that global immunization is feasible for any arbitrage-free affine term structure model, including the parallel shift model. Further, we show that immunization does not violate arbitrage-free pricing because the cost of immunization over time is positive. Consequently, immunization strategies based upon commonly used duration measures are not theoretically unsound.

publication date

  • January 1, 2006

Digital Object Identifier (DOI)

start page

  • 133

end page

  • 139

volume

  • 30

issue

  • 1