scholarly journals Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement

2021 ◽  
Author(s):  
Jens H. E. Christensen ◽  
Jose A. Lopez ◽  
Paul L. Mussche
Keyword(s):  
Financial Risk ◽  
Stress Testing ◽  
Yield Curve ◽  
Interest Rate Risk ◽  
Insurance Companies ◽  
Fixed Income ◽  
Bond Yields ◽  
Simple Tool ◽  
Interest Rate Risk Management

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. This paper was accepted by Kay Giesecke, finance.

scholarly journals Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

Risks ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 60
Author(s):  
Cláudia Simões ◽  
Luís Oliveira ◽  
Jorge M. Bravo
Keyword(s):  
Interest Rate ◽  
Yield Curve ◽  
Risk Measure ◽  
Management Strategies ◽  
Interest Rate Risk ◽  
Insurance Companies ◽  
Retirement Income ◽  
Investment Strategies ◽  
Immunization Strategies ◽  
The Impact

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies.

A Note Concerning the Dynamics of Government Bond Yields

2021 ◽  
pp. 056943452098827
Author(s):  
Tanweer Akram
Keyword(s):  
Interest Rate ◽  
Financial Markets ◽  
Yield Curve ◽  
Empirical Studies ◽  
State Theory ◽  
Government Bond ◽  
Bond Yields ◽  
Short Term ◽  
Government Bonds

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

scholarly journals Hedging Long-Term Liabilities*

2020 ◽  
Author(s):  
Rogier Quaedvlieg ◽  
Peter Schotman
Keyword(s):  
Yield Curve ◽  
Mean Squared Error ◽  
Factor Model ◽  
Interest Rate Risk ◽  
Time Varying ◽  
Hedging Strategy ◽  
Factor Loadings ◽  
Life Insurers ◽  
Five Factors

Abstract Pension funds and life insurers face interest rate risk arising from the duration mismatch of their assets and liabilities. With the aim of hedging long-term liabilities, we estimate variations of a Nelson–Siegel model using swap returns with maturities up to 50 years. We consider versions with three and five factors, as well as constant and time-varying factor loadings. We find that we need either five factors or time-varying factor loadings in the three-factor model to accommodate the long end of the yield curve. The resulting factor hedge portfolios perform poorly due to strong multicollinearity of the factor loadings in the long end, and are easily beaten by a robust, near Mean-Squared-Error- optimal, hedging strategy that concentrates its weight on the longest available liquid bond.

A MIXED BOND AND EQUITY FUND MODEL FOR THE VALUATION OF VARIABLE ANNUITIES

2020 ◽  
pp. 1-29
Author(s):  
Maciej Augustyniak ◽  
Frédéric Godin ◽  
Emmanuel Hamel
Keyword(s):  
Yield Curve ◽  
Fixed Income ◽  
Equity Fund ◽  
Basis Risk ◽  
Substantial Impact ◽  
Equity Funds ◽  
Rate Environment ◽  
Portfolio Return ◽  
Fund Return

Abstract Variable annuity (VA) policies are typically issued on mutual funds invested in both fixed income and equity asset classes. However, due to the lack of specialized models to represent the dynamics of fixed income fund returns, the literature has primarily focused on studying long-term investment guarantees on single-asset equity funds. This article develops a mixed bond and equity fund model in which the fund return is linked to movements of the yield curve. Theoretical motivation for our proposed specification is provided through an analogy with a portfolio of rolling horizon bonds. Moreover, basis risk between the portfolio return and its risk drivers is naturally incorporated into our framework. Numerical results show that the fit of our model to Canadian VA data is adequate. Finally, the valuation of VAs is illustrated and it is found that the prevailing interest rate environment can have a substantial impact on guarantee costs.

scholarly journals THEORETICAL ORDERING OF THE METHODS AND TOOLS OF FINANCIAL RISK MANAGEMENT OF INSURANCE COMPANIES

2017 ◽  
pp. 139-149 ◽  
Author(s):  
Nataliia Prykazyuk ◽  
Lesya Bilokin'
Keyword(s):  
Risk Management ◽  
Financial Risk ◽  
Stress Testing ◽  
Insurance Companies ◽  
Financial Risks ◽  
Insurance Company ◽  
Risk Avoidance ◽  
Financial Risk Management ◽  
Risk Transfer ◽  
And Control

Essence of methods and tools of financial risk management of insurance companies are defined. It has been founf out that the methods of financial risk management of the insurer can be called a system of techniques in the field of financial risk management. Its use allows to solve a number of tasks to a certain extent. For example, it can allow to foresee the occurrence of risk events in the process activities of insurance companies and identify different ways of their avoidance, minimization, and transfer, and to take measures to reduce the consequences of occurrence of such events to the insurer. It has been defined that the tools of financial risk management of the insurance company are the totality of means. With their help we can make the analysis, control and funding of possible financial risks of the insurer that can arise in the process of implementation of economic activity. The methods and tools of financial risk management are closely connected. The main methods of financial risk management of the insurance company are analyzed. The most common methods of risk management in insurance are risk assessment, risk avoidance, risk reduction, risk acceptance, risk transfer. The instruments of financial risk management of the insurer, in particular, stress testing, early warning tests, Monte-Carlo, VaR-methodology, methods, which are based on calculation of indicators of ES, EVA and RAROC, as well as hedging, diversification, valuation, self-insurance, co-insurance and reinsurance are defined. The necessity to use the methods and tools of financial risk management by insurance companies is defined. It has ben provrd that the insurance company should choose the most appropriate methods and tools for risk management. The company should also take into account all the peculiarities of its activities and will assist in the evaluation and control of existing and prevention of possible risks.

scholarly journals Attitudes of Rural Customers about the Need for Life Insurance Protection – A Study in Udupi District

2021 ◽  
Vol 8 (S1-Feb) ◽  
pp. 202-211
Author(s):  
Udaya Shetty K
Keyword(s):  
Life Insurance ◽  
Rural Areas ◽  
Financial Risk ◽  
Insurance Companies ◽  
Insurance Agents ◽  
Insurance Sector ◽  
Rural And Urban ◽  
Difficult Time ◽  
Risk Insurance

Insurance, in its many forms, touches the life of virtually every person in this country. Any society could not function effectively, efficiently or safely as it does were insurance-free. If there was no insurance, there would be so much uncertainty and exposure to loss that no business would be able to function and exist. Business would have an extremely difficult time obtaining any type of financing because few lenders would risk their capital without having a guarantee of safety for their investments. Insurance’s value to society is enormous and irreplaceable. Insurance protects hard-earned, accumulated assets while minimizing financial risk. Insurance does this by reimbursing people and business for covered losses, encouraging accident prevention and safety-oriented practices, providing funds for investment, enabling people to borrow money, and reducing anxiety. Even though insurance does do all these things, many people do not fully understand how insurance works or the value and security it brings to them.A strong insurance sector is of vital importance to every modern economy. It encourages the savings habit, provides safety to rural and urban enterprise and productive individuals. It generates long term investible funds for infrastructure building.India as a country is under–insured in the urban as well as the rural areas. Only 35 percent of the 250 million insurable population is insured .There exists a vast potential in the rural areas where more than 70% of our population lives. But it is common perception and belief amongst the insurance companies that it is expensive to do business in rural areas. The present Study on attitudes of rural customers throws lights on all vital issues of rural insurance, and covers opinion of insurance customers, insurance agents and business development executives selling life insurance policies. The study attempts to understand level of awareness of rural customers in order to suggest strategies for tapping untapped market. The study aimed at a thorough investigation into various issues which are the challenges in promnotion of life insurance business in rural areas.

Geopolitical uncertainty and sovereign bond yields of BRICS economies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sowmya Subramaniam
Keyword(s):  
Yield Curve ◽  
Central Banks ◽  
Bond Yields ◽  
Short Term ◽  
Content Type ◽  
Sovereign Bond ◽  
The Impact ◽  
The Relationship ◽  
Low Rate

Purpose The politically unstable economies have high and volatile sovereign spread. The purpose of this paper is to investigate the impact of geopolitical uncertainty on sovereign bond yields. Design/methodology/approach The sovereign yields at various maturities were decomposed into three factors, namely, level, slope and curvature, using the Dynamic Nelson Siegel model. The relationship between geopolitical uncertainty and the yield curve factors was examined using a quantile causality test. Findings The study found that at the extreme high-rate regime, geopolitical uncertainty causes the yield curve factors positively, indicating bond investors demand a higher return for geopolitical uncertainty. On the other hand, during extreme low-rate regime geopolitical causes the short- and medium-term factors negatively. The extreme low-rate regime indicates the period of economic slowdown. During this regime, the central banks try to reduce the short-term rates to stimulate growth. Originality/value This is one of the few papers that investigates the relationship between the geopolitical risk and sovereign bond yields at the various maturities and interest rate regimes. Understanding the relationship between the geopolitical risk and short-term rates would help the central banks the efficacy of their policy actions. The long-term rates are influenced by the global investor preferences; examining the relationship with the long-term rates would help the investors frame the trading strategies.

scholarly journals Robust long-term interest rate risk hedging in incomplete bond markets

2020 ◽  
pp. 1-28
Author(s):  
Sally Shen ◽  
Antoon Pelsser ◽  
Peter Schotman
Keyword(s):  
Yield Curve ◽  
Interest Rate Risk ◽  
Bond Markets ◽  
Risk Hedging ◽  
Hedging Portfolio ◽  
Robust Least Squares ◽  
Rate Environment ◽  
Market Consistent Valuation ◽  
Pension Liabilities

Abstract Pricing ultra-long-dated pension liabilities under the market-consistent valuation is challenged by the scarcity of the long-term market instruments that match or exceed the terms of pension liabilities. We develop a robust self-financing hedging strategy which adopts a min–max expected shortfall hedging criterion to replicate the long-dated liabilities for agents who fear parameter misspecification. We introduce a backward robust least squares Monte Carlo method to solve this dynamic robust optimization problem. We find that both naive and robust optimal portfolios depend on the hedging horizon and the current funding ratio. The robust policy suggests taking more risk when the current funding ratio is low. The yield curve constructed by the robust dynamic hedging portfolio is always lower than the naive one but is higher than the model-based yield curve in a low-rate environment.

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