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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

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In this report, we update the semi-annual Kamakura Corporation analysis of trading volume in single name credit default swaps as reported by the DepositoryTrust & Clearing Corporation (“DTCC”). This report takes on special significance because of the increased activity in the courts regardingpotential collusion in the credit default swap marketand because ofGreece’s failure to pay on its borrowings from the International Monetary Fund.

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The author wishes to thank Prof. Robert Jarrow for many years of helpful conversations on this important topic. We thank the staff of Kamakura Risk Information Services for the 100,000 scenarios used in this study.

We use 100,000 scenarios for the U.S. Treasury (TLT) yield curve to examine the outlook for Treasuries and the magnitude of the term premium (or risk premium) above and beyond expected rate levels that is embedded in the yield curve. The U.S. Treasury yield curve from which simulations are initiated is the June 26, 2015 yield curve as reported by the U.S. Department of the Treasury.

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Regulatory risk regulations launched in the wake of the credit crisis emphasize the impact of a wide range of macro-economic factors on the risk of financial institutions. Over the past few years, it has become standard for regulators to use more realistic models of interest rate movements than common practice among large financial institutions. The 2010 market risk regulations of the Bank for International Settlements require “at least six factors,” and the Federal Reserve’s 2015 Comprehensive Capital Analysis and Review process specifies 3 U.S. Treasury factors for stress testing.

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The author wishes to thank Prof. Robert Jarrow for many years of helpful conversations on this important topic. We thank the staff of Kamakura Risk Information Services for the 100,000 scenarios used in this study.

We use 100,000 scenarios for the U.S. Treasury (TLT) yield curve to examine the outlook for Treasuries and the magnitude of the term premium (or risk premium) above and beyond expected rate levels that is embedded in the yield curve. The U.S. Treasury yield curve from which simulations are initiated is the June 12, 2015 yield curve as reported by the U.S. Department of the Treasury.

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In this chapter, we follow Jarrow and van Deventer (2013) to show how to construct a mortgage valuation yield curve that correctly prices new mortgages originated in the primary market. The methodology is simple and transparent, and it avoids using the Libor-swap curve in the construction process. While the use of the Libor-swap curve in mortgage pricing and hedging is common practice, it is not best practice from a statistical and financial theory point of view, as we show in the chapter "Applications to Mortgage Valuation." More importantly, by avoiding the Libor-swap curve, we minimize the highly visible market manipulation risk that has tainted the integrity of many financial instruments over the last decade.

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