Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement

Jens H. E. Christensen (), Jose Lopez and Paul L. Mussche ()
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Jens H. E. Christensen: Federal Reserve Bank of San Francisco, San Francisco, California 94105
Paul L. Mussche: Federal Reserve Bank of San Francisco, San Francisco, California 94105

Management Science, 2022, vol. 68, issue 11, 8286-8300

Abstract: Insurance companies and pension funds have liabilities far into the future and typically well beyond the longest maturity bonds trading in fixed-income markets. Such long-lived liabilities still need to be discounted, and yield curve extrapolations based on the information in observed yields can be used. We use dynamic Nelson-Siegel (DNS) yield curve models to extrapolate risk-free yield curves for Switzerland and several countries. We find slight biases in extrapolated long bond yields of just a few basis points. In addition, the DNS model allows the generation of useful financial risk metrics, such as ranges of possible yield outcomes over projection horizons commonly used for stress-testing purposes. Therefore, we recommend using DNS models as a simple tool for generating extrapolated yields for long-term interest rate risk management.

Keywords: term structure modeling; capital regulation of insurance companies (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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http://dx.doi.org/10.1287/mnsc.2021.4215 (application/pdf)

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Working Paper: Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement (2019)
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