PT  - JOURNAL ARTICLE
AU  - Scott McDermott
TI  - Maximizing Capital Efficiency in US Defined Benefit Pension Plan Immunizing Portfolio Construction Using Derivatives and a Power Law Relationship
AID  - 10.3905/jpm.2022.1.350
DP  - 2022 Mar 31
TA  - The Journal of Portfolio Management
PG  - 166--181
VI  - 48
IP  - 5
4099  - https://pm-research.com/content/48/5/166.short
4100  - https://pm-research.com/content/48/5/166.full
AB  - The author puts forth a framework for how to invest efficiently against the two dominant risk factors facing US pension plans—interest rates and credit spreads—as a function of the capital allocated to the asset–liability risk management function (the immunizing portfolio [IP]). The framework uses derivatives and other instruments to vary the nature of the hedge investments as a function of IP capital and seeks efficient use of that capital. The result is a glide path for the IP capital allocation that emphasizes interest rate risk management when IP capital is scarce while balancing interest rate and credit risk management when IP capital is plentiful.