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 About Donald

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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Kamakura Corporation
2222 Kalakaua Avenue

Suite 1400
Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898

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Phone: 215.932.0312

Andrew Zippan
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Phone: 647.405.0895
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Toshio Murate
Phone: +03.5778.7807

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kamakura blog

In this note we update our October 4, 2017 analysis of realized and “in progress” term premiums in the U.S. Treasury market through December 31, 2017.

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In 1996, the U.S. Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly declared their rejection of a standardised regulatory model for interest rate risk:

“…the agencies have decided that concerns about the burdens, costs, and potential incentives of implementing a standardized measure and explicit capital treatment currently outweigh the potential benefits that such measures would provide. The agencies are cognizant that techniques for measuring interest rate risk are continuing to evolve, and they do not want to impede that progress by mandating or implementing prescribed risk measurement techniques.”

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“It doesn't make sense to hire smart people and then tell them what to do. We hire smart people so they can tell us what to do.”

Steve Jobs, from Steve Jobs: His Own Words and Wisdom


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The magnitude of a “term premium” or risk premium in long term U.S. Treasury yields is a major focus of research by economists in the Federal Reserve System.  A recent paper by Canlin Li, Andrew Meldrum, and Marius Rodriguez summarizes two important papers on this topic and reviews their methodologies.  Adrian, Crump, Mills and Moench (2014) summarize their term premium findings as follows: “The evolution of term premia has been of particular interest since the Federal Reserve began large-scale asset purchases. Over this time, short-term interest rates have been close to zero, and our estimates show that the term premium has been compressed and has at times even been negative.” Estimates of the term premium are a function of the data used, the modeling approach taken, and market expectations.

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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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