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Measuring Interest Rate Risk in the Very Long Term

Author

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  • Jens H. E. Christensen
  • Jose A. Lopez
  • Paul Mussche

Abstract

Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the 30-year maturities for the longest U.S. Treasuries, it?s difficult to measure the interest rate risk involved. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model. These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.

Suggested Citation

  • Jens H. E. Christensen & Jose A. Lopez & Paul Mussche, 2017. "Measuring Interest Rate Risk in the Very Long Term," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfel:00127
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