Study Shows 3.72% Impact on One Year U.S. Treasury Yield
Kamakura Corporation announced on Wednesday that it has released a new study by Kamakura Managing Director Prof. Robert A. Jarrow and Prof. Hao Li entitled “The Impact of Quantitative Easing on the Term Structure of Interest Rates.” The study estimates an arbitrage-free term structure model that explicitly includes the quantity impact of the Federal Reserve’s trades on Treasury market prices. This allows the authors to estimate both the magnitude and duration of the quantitative easing price effects. The authors conclude that the short to medium term forward rates in the U.S. Treasury market were reduced but that the quantitative easing program had little if any impact on long term forward rates, contrary to the Fed’s stated intentions of the quantitative easy program.
Prof. Jarrow commented on the study’s results, “Our study shows that long term forward rates were not affected by the quantitative easing program. Since bond yields are averages of forward rates over a bond’s entire life, however, quantitative easing did affect long term bond yields. The average impacts on bond yields were 372, 32, 55, 73 and 79 basis points for 1, 2, 5, 10 and 30 years respectively. Our 1 year yield change is significantly greater than that in the existing literature on this topic.”
Martin Zorn, Chief Administrative Officer for Kamakura Corporation, added Wednesday, “The study by Jarrow and Li shows the practical power of multi-factor term structure models using the Heath Jarrow and Morton approach. Legacy risk management systems rely on one factor term structure models which often are inconsistent with the initial yield curve. The 2 and 3 factor models used by Jarrow and Li in this study are ‘arbitrage free’ due to their consistency with the no arbitrage conditions derived by Heath Jarrow and Morton. Kamakura Risk Manager brings the same multi-factor term structure modeling approach to enterprise risk management and asset and liability management, with no limit on the number of risk factors driving the term structure of interest rates. We believe the Jarrow and Li study is of great importance to policy makers and risk managers around the world. We strongly encourage risk managers in particular to abandon the legacy one factor models that lack the insights which Jarrow and Li demonstrate with a multi-factor HJM approach.”