INVESTMENT DIMENSION AND HORIZON IN IMMUNIZED PORTFOLIOS: AN ANALYSIS UNDER THE PERSPECTIVE OF COMPLEMENTARY PRIVATE PENSION PLAN SYSTEMS

Abstract

Immunization is defined as the investment in assets in such a way that the fixed income portfolio is immune to a change in interest rates. In the special case of pension funds, immunization seeks the distribution of the cash inflows in accordance with the outflows represented by the fund’s liabilities. The article seeks to compare the performance of different models of immunization based on distinct mathematical programming constraints when applied to interest rate risk management of a predetermined flow of payments within a pension fund. Although there is a great amount of articles that try to tackle interest rate risk and deal with the statistical aspects and economic meaning of many sorts of immunization models, this article represents an attempt to provide an unique comprehensive analysis that takes into account not only the method itself, but also the dimension and the investment horizon of the pension fund industry.  It is demonstrated that traditional duration models, when examined under the conjoint perspective of interest rate risk mitigation, imposed constraints to set up the immunized portfolios and associated transaction costs, are more efficient, especially on the medium and long terms. Multidimensional models presented a better performance only on a short term basis.