Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement

Jens Christensen, Jose Lopez and Paul Mussche

No 2018-9, Working Paper Series from Federal Reserve Bank of San Francisco

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 for extrapolating risk-free yield curves for Switzerland, Canada, France, and the U.S. We find slight biases in extrapolated long bond yields of 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 regulations; insurance companies (search for similar items in EconPapers)
JEL-codes: E43 E47 G12 G22 G28 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2019-03-22
New Economics Papers: this item is included in nep-ias, nep-mac and nep-rmg
Note: The first version of this paper was July 6, 2018.
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Journal Article: Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement (2022)
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DOI: 10.24148/wp2018-09

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