A framework for modeling the liquidity and interest rate risk of demand deposits

Detta är en Master-uppsats från KTH/Matematisk statistik; KTH/Matematisk statistik


The objective of this report is to carry out a pre-study and develop a framework for how the liquidity and interest rate risk of a bank's demand deposits can be modeled. This is done by first calibrating a Vasicek short rate model and then deriving models for the bank's deposit volume and deposit rate using multiple regression.

The volume model and the deposit rate model are used to determine the liquidity and interest rate risk, which is done separately. The liquidity risk is determined by a liquidity quantile which estimates the minimum deposit volume that is expected to remain in the bank over a given time period. The interest rate risk is quantified by an arbitrage-free valuation of the demand deposit which can be used to determine the sensitivity of the net present value of the demand deposit caused by a parallel shift in the market rates. Furthermore, an immunization and a replicating portfolio are constructed and the performances of these are tested when introducing the same parallel shifts in the market rates as in the valuation of the demand deposit.

The conclusion of this thesis is that the framework for the liquidity risk management that is developed gave satisfactory results and could be used by the bank if the deposit volume is estimated on representative data and a more accurate model for the short rate is used. The interest rate risk framework did however not yield as reliable results and would be more challenging to implement as a more advanced model for the deposit rate is required.

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