Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement


Jose A. Lopez

Paul L. Mussche

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2018-09 | May 1, 2019

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.

Article Citation

Christensen, Jens H. E., Jose A. Lopez, and Paul L. Mussche. 2018. “Extrapolating Long-Maturity Bond Yields for Financial Risk Measurement,” Federal Reserve Bank of San Francisco Working Paper 2018-09. Available at https://doi.org/10.24148/wp2018-09

About the Author
Jens Christensen
Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen