ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

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.

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A 7-Factor Heath, Jarrow, and Morton Stochastic Volatility Model for the Government of France Yield Curve, Using Daily Data from January 2, 2015 through January 31, 2022

03/17/2022 09:45 AM

Donald R. van Deventer[1]

First Version: March 8, 2022

This Version: March 8, 2022

ABSTRACT

Please note: Kamakura Corporation term structure models are updated monthly. For the most recent set of coefficients, contact info@kamakuraco.com

This paper analyzes the number and the nature of factors driving the movements in the French Government Securities yield curve from January 2, 2015 through January 31, 2022. The French data set is very unique, both for its short length and the predominance of observations with negative yields. Even in this data environment, it is possible to use the data to confirm a number of conclusions. 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 French experience with negative interest rates into term structure models with stochastic. Fourth, we compare data availability for France with broad international experience to measure the risk that a simulation beyond historical rate levels in France could go awry. Finally, we illustrate the process for comparing stochastic volatility and affine models of the term structure. We conclude that stochastic volatility models, when out of sample performance is the primary interest, have a superior fit to the history of yield movements in the French Government Securities market. We also recommend that French Government Securities interest rate risk analysis employ the full “World” 13-country term structure model rather than relying solely on France data alone.

A copy of the full paper is available here:

Kamakura-AnUpdatedHJMModelforFrancev120220131
 

FOOTNOTES:

[1] Kamakura Corporation, 2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii, USA, 96815. E-Mail dvandeventer@kamakuraco.com. The author wishes to thank Prof. Robert A. Jarrow for 28 years of conversations on this topic. The author is grateful to Daniel Dickler, Eric Penanhoat, Dr. Xiaoming Wang, and Theodore Spradlin for analytical and data-related assistance. The author also wishes to thank the participants at seminars organized by the Bank of Japan and the Federal Reserve Bank of San Francisco at which a paper addressing similar issues in a Japan and U.S. government bond context was presented.

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

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