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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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Today’s forecast for U.S. Treasury yields is based on the March 8, 2012 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 p.m. Eastern Standard Time March 9, 2012. 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 the first blog in this series, we provided a worked example of interest rate modeling and valuation using the Heath Jarrow and Morton framework and the assumption that forward rate volatility was dependent on years to maturity using actual U.S. Treasury yields prevailing on March 31, 2011 and historical volatility from 1962-2011.  In this blog, the second in the series, we increase the realism of the forward rate volatility assumption.  Actual data makes it very clear that forward rate volatility depends not just on the time to maturity of the forward rate but also on the level of spot interest rates.  This blog shows how to incorporate that assumption into the analysis for enhanced accuracy and realism.

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In a recent series of blogs, Dickler, Jarrow and van Deventer reviewed 50 years of daily U.S. Treasury interest rate movements.  They concluded that U.S. interest rates are driven by 5-10 random factors, a much larger number of factors than major financial institutions typically use for interest rate risk management.  In a series of 3 papers, David Heath, Robert A. Jarrow and Andrew Morton (1990, 1990, 1992) introduced the “Heath Jarrow and Morton” (“HJM”) framework for modeling interest rates driven by a large number of random factors while preserving the standard “no arbitrage” assumptions of modern finance.  This blog, the first of a series, provides a worked example of a basic Heath Jarrow and Morton implementation assuming one random factor with maturity dependent interest rate volatility.

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Today’s forecast for U.S. Treasury yields is based on the March 1, 2012 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 p.m. Eastern Standard Time March 2, 2012. 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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On February 21, 2012, the Journal of Investment Management announced the winners of the Harry M. Markowitz award for the best paper of 2011 in the Journal of Investment Management.  Four Nobel Prize winners, including Robert C. Merton, awarded the prize to John Y. Campbell (Harvard University), Jens Hilscher (Brandeis University and Senior Research Fellow at Kamakura Corporation) and Jan Szilagyi (Hawker Capital LLP) for their paper “Predicting Financial Distress and the Performance of Distressed Stocks.”  More than any other event, this award marks the definitive end to the debate about whether or not reduced form models are superior to the Merton model of risky debt.  This blog explains why.

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