In 2018, Risk & Regulatory Consulting conducted a study on methodologies used for yield curve extrapolation to value liability cash flows that extend beyond the maximum observable portion of the yield curve. The study was sponsored by the Society of Actuaries (SOA) Committee on Finance Research. We performed research on the methods available in theory and used in practice and also developed and provided questionnaires to a broad group of subject-matter experts with strong industry representation to comment on these methods, in order to provide a comprehensive view of the yield curve extrapolation methods. We developed the interview questionnaire based on an initial review of the literature and covered topics such as
· industry approaches for extrapolating the yield curve and the
situations (specific products, specific applications) in which
each is used;
· key assumptions and mechanics considered in the
extrapolation of the yield curve;
· benefits and drawbacks of the various approaches; and
· practical challenges that arise from various methods.