Arbitrage opportunities and immunization |
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Authors: | Joel R. Barber Mark L. Copper |
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Affiliation: | 1. College of Business Administration, Department of Finance, Florida International University, 33199, Miami, FL
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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. |
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