Finance Department

 

Date of this Version

1997

Document Type

Article

Citation

Journal of Actuarial Practice 5 (1997), pp. 153-180

Comments

Copyright 1997 Absalom Press

Abstract

A bond portfolio selection model is developed in a dynamic framework using different term structures, but without transactions costs. We show that the optimal portfolios are consistent with Khang's dynamic immunization theorem, i.e., the optimal path consists of making portfolio duration equal to the investor's horizon planning period. The model is then extended to include transaction costs. The resulting optimal portfolios are no longer consistent with Khang's dynamic immunization theorem. In fact, the strategy for constructing the optimal portfolio consists of initially choosing a portfolio with a duration that is smaller than the horizon planning period.

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