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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

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This paper analyzes the number and the nature of factors driving the movements in the German Bund yield curve from January 1, 1996 through March 27, 2017. The process of model implementation reveals a number of important insights for interest rate modeling generally. First, model validation of historical yields is important because those yields are the product of a third-party curve fitting process that may produce spurious indications of interest rate volatility. Second, quantitative measures of smoothness and international comparisons of smoothness provide a basis for measuring the quality of historical and simulated yield curves. We find that the yield curve smoothing by the third-party vendor used for Germany required careful vetting. Third, we outline a process for incorporating insights from the Japanese experience with negative interest rates into term structure models with stochastic volatility in Germany and other countries.
 

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This paper analyzes the number and the nature of factors driving the movements in the United Kingdom Government Securities Yield Curve from January 2, 1979 through January 31, 2017. The process of model implementation reveals a number of important insights for interest rate modeling generally. First, model validation of historical yields is important because those yields are the product of a third-party curve fitting process that may produce spurious indications of interest rate volatility. Second, quantitative measures of smoothness and international comparisons of smoothness provide a basis for measuring the quality of simulated yield curves. Third, we outline a process for incorporating insights from the Japanese experience with negative interest rates into term structure models with stochastic volatility in the United Kingdom and other countries.

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Government yield curves are a critical input to the risk management calculations of central banks, bank regulators, major banks, insurance firms, fund managers, pension funds, and endowments around the world.  With the internationalization of fixed income investing, it is important to understand the dynamics of movements in yield curves world-wide, in addition to the major bond markets like those in Frankfurt, London, New York and Tokyo. In this paper, we fit a multi-factor Heath, Jarrow and Morton model to daily data from the U.S. Treasury market over the period from January 2, 1962 to March 31, 2017. The modeling process reveals a number of important implications for term structure modeling in other government bond markets.

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This paper analyzes the number and the nature of factors driving the movements in the Japanese Government Bond yield curve from September 24, 1974 through December 30, 2016. The process of model implementation reveals a number of important insights for interest rate modeling generally. First, model validation of observed yields is important because those yields are the product of a third-party curve fitting process that may produce spurious indications of interest rate volatility.

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In this note, we interview an enormously successful individual investor who earned 10.01% on his fixed income portfolio over the last year, 9.57% better than the 0.44% total return on the bond market aggregate AGG exchange traded fund (AGG).  The investor prefers to remain anonymous, but he agreed to this brief interview in order to help other individual investors achieve similar success.  We use the pseudonym “Mr. X.”

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