The duration derby: a comparison of duration based strategies in asset liability management

The Macaulay duration matched strategy is a key tool in bond portfolio immunization. It is well known that if term structures are not flat or changes are not parallel, then the Macaulay duration matched portfolio can not guarantee adequate immunization. In the paper the approximate duration is proposed to measure the bond price sensitivity to changes of interest rates of non-flat term structures. Its performance in immunization is compared with those of Macaulay and key rate durations using the US Treasury strips and bond data. Approximate duration turns out to be a possible contender in asset liability management: it does not assume any particular structures or patterns of changes of interest rates, it does not need short selling of bonds, and it is easy to set up and rebalance the optimal portfolio with linear programming.