The Duration Derby : A Comparison of Duration-Based Strategies in Asset Liability Management

In this paper we canvass the use of a duration measure based on approximate duration which has the advantage of not being sensitive to non-parallel shifts in the term structure in the same manner as the Macaulay duration. The paper compares the performance of bond immunization strategies based on this approach with other immunization strategies based on the Macaulay, partial and key rate durations using US Treasury Strips and Bond data. Approximate duration emerges as a useful tool for asset liability management with the following advantages: it is easy to set up and rebalance the optimal portfolio using linear programming, it does not require any short selling of bonds and it does not assume any pattern or structure to changes in interest rates