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Bridge over ocean
1 September 1996 Financial Analysts Journal Volume 52, Issue 5

An Improved Immunization Strategy: M-Absolute

  1. Sanjay K. Nawalkha
  2. Donald R. Chambers

Current immunization models have limited power in interest rate risk protection. A new approach, entitled M-Absolute, is designed to provide powerful and practical single-risk-measure immunization in particular circumstances. M-Absolute is similar to M-Square but is derived as a first-order lower bound immunization risk model. Like duration, M-Absolute can be implemented as a simple, single-risk-measure immunization model. M-Absolute of a bond is defined as the weighted average of the absolute distances of the bond's cash flows from a horizon point. Even though it is a single-risk measure, M-Absolute can act effectively to reduce the impacts of several types of interest rate risks rather than hedge against only a single type of term structure shift. Empirical tests show that M-Absolute reduces the interest rate risk inherent in the traditional duration model by more than half. These results are independent of the particular time period chosen.

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