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Risk management of non-maturing liabilities [An article from: Journal of Banking and Finance]
Book Details
Author(s)M. Kalkbrener, J. Willing
PublisherElsevier
ISBN / ASINB000RR11TK
ISBN-13978B000RR11T8
AvailabilityAvailable for download now
Sales Rank11,190,039
MarketplaceUnited States 🇺🇸
Description
This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
Risk management of non-maturing liabilities is a relatively unstudied issue of significant practical importance. Non-maturing liabilities include most of the traditional deposit accounts like demand deposits, savings accounts and short time deposits and form the basis of the funding of depository institutions. Therefore, the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits. In this paper we propose a stochastic three-factor model as general quantitative framework for liquidity risk and interest rate risk management for non-maturing liabilities. It consists of three building blocks: market rates, deposit rates and deposit volumes. We give a detailed model specification and present algorithms for simulation and calibration. Our approach to liquidity risk management is based on the term structure of liquidity, a concept which forecasts for a specified period and probability what amount of cash is available for investment. For interest rate risk management we compute the value, the risk profile and the replicating bond portfolio of non-maturing liabilities using arbitrage-free pricing under a variance-minimizing measure. The proposed methodology is demonstrated by means of a case study: the risk management of savings accounts.
Description:
Risk management of non-maturing liabilities is a relatively unstudied issue of significant practical importance. Non-maturing liabilities include most of the traditional deposit accounts like demand deposits, savings accounts and short time deposits and form the basis of the funding of depository institutions. Therefore, the asset and liability management of depository institutions depends crucially on an accurate understanding of the liquidity risk and interest rate risk profile of these deposits. In this paper we propose a stochastic three-factor model as general quantitative framework for liquidity risk and interest rate risk management for non-maturing liabilities. It consists of three building blocks: market rates, deposit rates and deposit volumes. We give a detailed model specification and present algorithms for simulation and calibration. Our approach to liquidity risk management is based on the term structure of liquidity, a concept which forecasts for a specified period and probability what amount of cash is available for investment. For interest rate risk management we compute the value, the risk profile and the replicating bond portfolio of non-maturing liabilities using arbitrage-free pricing under a variance-minimizing measure. The proposed methodology is demonstrated by means of a case study: the risk management of savings accounts.
