AN EMPIRICAL STUDY OF BOND PORTFOLIO IMMUNIZATION EFFECTIVENESS DURING 2008 GLOBAL FINANCIAL CRISIS
Immunization is a strategy that matches the duration of assets and liabilities to minimize the impact of interest rate changes. This can be achieved using Redington’s conditions. This paper addresses a gap in the existing literature: while prior immunization studies typically evaluate performance under stable market conditions or rely on real bond portfolios that confound interest rate risk with credit and liquidity risk, this study isolates pure interest-rate risk by constructing a synthetic default-free bond and liability portfolio priced on historical U.S. Treasury par yield curve data spanning January 2006 to December 2010 — the pre-crisis, crisis, and recovery phases of the GFC. Applying Redington's immunization conditions to this synthetic portfolio, the study finds that the present value of assets equals the present value of liabilities (Test 1: passed) and that asset convexity exceeds liability convexity (Test 3: passed); however, the volatility of the asset cashflows (4.50) diverges substantially from that of the liability cashflows (2.64), so the volatility-matching condition fails (Test 2: failed). Consequently, the portfolio is only partially immunized: it remains exposed to small parallel shifts in the yield curve despite its favourable convexity position for larger shifts. The findings indicate that duration-based immunization, even when correctly specified for present-value matching, requires explicit volatility matching to pro-vide reliable protection during periods of extreme interest rate volatility such as the 2008 GFC, and that partial immunization can still leave institutional investors exposed to material losses.