A Simple Approach to Estimate Long-Term Interest Rates
Journal of Pension Economics and Finance (JPEF), forthcoming
45 Pages Posted: 11 Dec 2018 Last revised: 8 Nov 2022
Date Written: September 30, 2022
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: Suggested Citation