Constant-Duration Bond Portfolios: Continuous Time Models
Abstract Modern portfolio management frequently employs duration-targeting strategies to optimize the trade-off between risk and return. These strategies maintain a stable portfolio duration through periodic rebalancing, preserving a consistent exposure to interest rate fluctuations. Practical implementations include index-tracking and ladder portfolios. As demonstrated by Martin L. Leibowitz and his co-authors [1–4], a key feature of duration targeting is its ability to concentrate return distributions around a minimum-variance point, which occurs when the portfolio's duration is approximately half the investment horizon. In this study, we analyze stochastic interest rate models in the context of constant-duration portfolios. The analysis explores cases where the yield curve is both flat and of an arbitrary shape. A related discussion in Russian has been published on the Zen platform . Holding Period Return Calculation fo...