A Simple Approach to Estimate Long-Term Interest Rates

SAFE Working Paper No. 238

Journal of Pension Economics and Finance (JPEF), forthcoming

45 Pages Posted: 11 Dec 2018 Last revised: 8 Nov 2022

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Zorka Simon

Leibniz Institute for Financial Research SAFE

Date Written: September 30, 2022

Abstract

We propose an easy to implement yield curve extrapolation method to determine long-term interest rates suitable for regulatory valuation. We empirically evaluate this approach for the German nominal bond market, by estimating the model on bonds with maturities up to 20 years and assessing the out-of-sample performance for bonds with maturities beyond 20 years. Even though observed long-term yields are somewhat lower than the predicted yields, the method performs quite well empirically given its simplicity. We perform a case study on pension fund liability valuation and show that our proposed method would have a substantial impact on liability values.

Keywords: Sovereign Bonds, Term Structure of Interest Rates, Segmentation, Liquidity, Flight-to-safety, Credit Risk, Unconventional Monetary Policy

JEL Classification: G01, G12, G15, G18

Suggested Citation

Driessen, Joost and Nijman, Theo E. and Simon, Zorka, A Simple Approach to Estimate Long-Term Interest Rates (September 30, 2022). SAFE Working Paper No. 238, Journal of Pension Economics and Finance (JPEF), forthcoming, Available at SSRN: https://ssrn.com/abstract=3296959 or http://dx.doi.org/10.2139/ssrn.3296959

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Zorka Simon (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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