Interest rate risk in the banking book: A closed-form solution for non-maturity deposits
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Publication date
2021
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01A - Journal article
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Journal of Banking and Finance
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Volume
125
Issue / Number
106080
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Elsevier
Place of publication / Event location
Amsterdam
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Abstract
I present an analytical valuation framework for the management of fixed-income instruments traded in imperfectly competitive markets, like demand deposits and credit card loans in the banking book, inter alia, to stabilize the abnormal profit margin. Banking book instruments contain embedded options such as withdrawal rights, discretionary pricing, rate clustering and zero-based floors. Analytical solutions speed up computation time to calculate valuations, earnings and risk measures like closed-form expressions for margin spreads, hedge ratios and parameter sensitivities. Asymptotically, according to martingale central limit theorems and thanks to the long-term nature of the banking book, Gaussian approximations can be applied.
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0378-4266
Language
English
Created during FHNW affiliation
Yes
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Published
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Peer review of the complete publication
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Closed
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Citation
Blöchlinger, A. (2021). Interest rate risk in the banking book: A closed-form solution for non-maturity deposits. Journal of Banking and Finance, 125(106080). https://doi.org/10.1016/j.jbankfin.2021.106080