Working Paper

Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement

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;

JEL Classification: E43; E47; G12; G22; G28;

https://doi.org/10.24148/wp2018-09

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2019-03-22

Number: 2018-9

Note: The first version of this paper was July 6, 2018.

Related Works

• https://www.frbsf.org/economic-research/publications/working-papers/2018/09/