Chartis Research Report Ranks Kamakura Risk Manager (Fiserv KRM) Number 1 in the World
Kamakura Blog: Observations on the Monoline Meltdown
A Happiness Survey of Risk Managers
Basic Building Blocks of Yield Curve Smoothing, Part 12: Smoothing with Bond Prices as Inputs
An Appreciation: Sebastián Piñera, President-Elect of Chile
In the first 10 installments of this series on yield curve smoothing, we committed the most common sin there is in the yield curve smoothing literature. We used one set of “made up” data instead of hundreds or thousands of real data points to judge the performance of yield curve smoothing techniques. In this blog, we explain why the test proposed by David Shimko is essential to judging the accuracy and realism of yield curve smoothing techniques. We dust off some old yield data from the attic to illustrate how the test works. Read More »
In the first 10 installments of this series on yield curve smoothing, we committed the most common sin there is in the yield curve smoothing literature. We used one set of “made up” data instead of hundreds or thousands of real data points to judge the performance of yield curve smoothing techniques. In this blog, we explain why the test proposed by David Shimko is essential to judging the accuracy and realism of yield curve smoothing techniques. We dust off some old yield data from the attic to illustrate how the test works.
Read More »
After riding up Mauna Kea volcano yesterday, Lance Armstrong is getting ready to travel from the Big Island of Hawaii to Adelaide for the Tour Down Under and the start of the 2010 cycling season. Thanks to a blog that I stumbled on over the holidays, it seems like a good time to appreciate the risk management lessons from Lance over the years. That’s the subject of today’s post. Read More »
After riding up Mauna Kea volcano yesterday, Lance Armstrong is getting ready to travel from the Big Island of Hawaii to Adelaide for the Tour Down Under and the start of the 2010 cycling season. Thanks to a blog that I stumbled on over the holidays, it seems like a good time to appreciate the risk management lessons from Lance over the years. That’s the subject of today’s post.
In Part 10 of this series, we present the final installment in yield curve and forward rate smoothing techniques before moving on to smoothing credit spreads. We introduce the maximum smoothness forward rate technique introduced by Adams and van Deventer (1994) and corrected in van Deventer and Imai (1996), which we call Example H. We explain why a quartic function is needed to maximize smoothness of the forward rate function over the full length of the forward rate curve, just as twice differentiable yield curve segments produce a shorter length yield curve over the full length of the curve even though the shortest length between any two points is a linear function. Finally, we compare 23 different techniques for smoothing yields and forward rates that have been discussed in this series and show why the maximum smoothness forward rate approach is the best technique by multiple criteria. Read More »
In Part 10 of this series, we present the final installment in yield curve and forward rate smoothing techniques before moving on to smoothing credit spreads. We introduce the maximum smoothness forward rate technique introduced by Adams and van Deventer (1994) and corrected in van Deventer and Imai (1996), which we call Example H. We explain why a quartic function is needed to maximize smoothness of the forward rate function over the full length of the forward rate curve, just as twice differentiable yield curve segments produce a shorter length yield curve over the full length of the curve even though the shortest length between any two points is a linear function. Finally, we compare 23 different techniques for smoothing yields and forward rates that have been discussed in this series and show why the maximum smoothness forward rate approach is the best technique by multiple criteria.
In Part 8 of this series, we observed that it has been proven that a cubic spline, in general, produces the smoothest set of curves that one can draw between data points. This is certainly true in the case of smoothing the yield curve. As we show in part 10 of this blog series, this is NOT TRUE in the case of a cubic spline of forward rate curves if we apply the normal constraints one needs to fit observable financial data. In this post, we ignore that insight and flail ahead, erroneously assuming that if splines work reasonably well when applied to yields, they will work even better when applied to forward rates. In Example G, we apply cubic splines to forward rates and derive the related yields. The results clearly illustrate why a true “maximum smoothness” approach is needed. We deliver that approach in Part 10, which explains the full maximum smoothness approach first proposed by Adams and van Deventer in 1994. Read More »
In Part 8 of this series, we observed that it has been proven that a cubic spline, in general, produces the smoothest set of curves that one can draw between data points. This is certainly true in the case of smoothing the yield curve. As we show in part 10 of this blog series, this is NOT TRUE in the case of a cubic spline of forward rate curves if we apply the normal constraints one needs to fit observable financial data. In this post, we ignore that insight and flail ahead, erroneously assuming that if splines work reasonably well when applied to yields, they will work even better when applied to forward rates. In Example G, we apply cubic splines to forward rates and derive the related yields. The results clearly illustrate why a true “maximum smoothness” approach is needed. We deliver that approach in Part 10, which explains the full maximum smoothness approach first proposed by Adams and van Deventer in 1994.
In our blog on December 4, we argued that it’s obvious that the basis for compensation varies by the job: football coaches are paid for their skill, but large company CEOs are not. Large company CEOs, we argued, are winners of a lottery that entitles them to huge payouts during their brief tenure. In that piece, we compared the high correlation between skill and compensation among American collegiate football coaches and financial services CEOs, focusing on Coach June Jones of the Southern Methodist University Mustangs and Lloyd Blankfein, CEO of Goldman Sachs. Santa Claus came earlier this year, delivering updates on both men on December 23 and 24. We also add an update for the firing of Texas Tech's Mike Leach on 12/30. Read More »
In our blog on December 4, we argued that it’s obvious that the basis for compensation varies by the job: football coaches are paid for their skill, but large company CEOs are not. Large company CEOs, we argued, are winners of a lottery that entitles them to huge payouts during their brief tenure. In that piece, we compared the high correlation between skill and compensation among American collegiate football coaches and financial services CEOs, focusing on Coach June Jones of the Southern Methodist University Mustangs and Lloyd Blankfein, CEO of Goldman Sachs. Santa Claus came earlier this year, delivering updates on both men on December 23 and 24. We also add an update for the firing of Texas Tech's Mike Leach on 12/30.
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