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

 Blog Entries

Kamakura Corporation Named to World Finance 100

August 26, 2014
Transfer Pricing and Valuation Yield Curves without Swap Data: A KeyBank and KeyCorp Example

August 18, 2014
More Evidence on the Funding “Subsidy” of the Too Big to Fail Banks

August 14, 2014
Mortgage Servicing Rights Values Close Mixed for the Week as Current and Forward Mortgage Rates Drop 0.03%

August 13, 2014
Liquidity At Risk – A stochastic look at cashflows

August 12, 2014
Five of Seven Regional Banks Trade at Credit Spreads Better than the Too Big to Fail Banks

August 12, 2014
Kinder Morgan Energy Partners Leads the 20 Best Value Bond Trades with Maturities of 10 Years or More

August 11, 2014
Measuring the Funding Costs of the Too Big to Fail Banks:
The U.S. Dollar Cost of Funds Index™


August 8, 2014
Forward 1 Month T-Bill Rates Plunge 0.26% in 2 Years but Forward 10 Year U.S. Treasury Yield Drops Only 0.04% from Last Week

August 6, 2014
Credit Spreads and Default Probabilities: A Simple Model Validation Example

August 5, 2014
Vodafone Group PLC: Default Risk is Down Sharply But Value Ranks in the Bottom 10% of Bonds

July 30, 2014
American International Group Inc. Bonds:
A Reward to Risk Ratio Twice as High as the Median Bond Issue


July 29,2014
AT&T Inc. Bonds: Ten Times the Risk of IBM and Below Average Value

July 15, 2014
Brazil, Italy, Spain, Credit Default Swaps and the
European Commission Short Sale Ban, 2010-2014


July 14, 2014
Bank of America and MBIA Lead U.S. Bank Credit Default Swap Trading Volume, 2010-2014

March 19, 2014
Stress Testing and Interest Rate Risk Models: A Multi-Factor Stress Testing Example

March 13, 2014
Stress Testing: A Credit Spread Ranking of 12 U.S. and 12 International Banks

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Kamakura Blog

  

One of the lessons of the credit crisis of 2007-2010 was that the conventional wisdom can be a dangerous thing.  The conventional wisdom in early 2006 said that “home prices in the United States do not go down” and that the copula method was an accurate method for valuing tranches of collateralized debt obligations.  Another complex security valuation issue is becoming increasingly important: the valuation of mortgage servicing rights.  This blog talks about potential modeling risks in the conventional wisdom for valuing mortgage servicing rights and how to deal with those risks.

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Today’s forecast for U.S. Treasury yields is based on the December 1, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm December 2, 2011. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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Today’s forecast for U.S. Treasury yields is based on the November 23, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm November 25, 2011 because interest rate data was not available for November 24 due to the holiday. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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In our blog of November 7, 2011, we showed that the one–factor term structure models in wide use in the financial services business for interest rate management analytics were consistent with actual daily movements of the U.S. Treasury curve less than 38% of 12,286 business days since 1962.  In this blog, we repeat the analysis on the Libor-swap curve and reach an even more devastating conclusion: once the full interest rate swap curve came into view in 1988, daily yield curve shifts were consistent with one factor models less than 8% of the time.  This blog explains how we arrived at those conclusions.

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Today’s forecast for U.S. Treasury yields is based on the November 17, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm November 18, 2011. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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