Hedging to reduce or eliminate the common factors influencing an interest rate-sensitive portfolio's value requires a model of interest rate behavior. This model may be formal, or it may be an ad hoc statistical model. The most widely used method for hedging bond portfolios is duration immunization, which matches the Macaulay duration of assets and liabilities. Macaulay duration is based on the assumption that interest rates for all maturities move up and down in parallel. Even though this assumption is false, Macaulay duration hedging is still widely used.
More advanced models assume that movements in interest rates have several components.
His empirical analysis shows that since 1970 the structure of these factors has not changed appreciably even though interest rate volatility has. Bliss provides a numerical example demonstrating that hedging based on these three factors is superior to hedging based on the traditional method of Macaulay duration.