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Interest Rate Risk Management using Duration Gap Methodology

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Author Info

  • Dan Armeanu
  • Florentina-Olivia Balu
  • Carmen Obreja

    (Academia de Studii Economice, Bucuresti)

Abstract

The world for financial institutions has changed during the last 20 years, and become riskier and more competitive-driven. After the deregulation of the financial market, banks had to take on extensive risk in order to earn sufficient returns. Interest rate volatility has increased dramatically over the past twenty-five years and for that an efficient management of this interest rate risk is strong required. In the last years banks developed a variety of methods for measuring and managing interest rate risk. From these the most frequently used in real banking life and recommended by Basel Committee are based on: Reprising Model or Funding Gap Model, Maturity Gap Model, Duration Gap Model, Static and Dynamic Simulation. The purpose of this article is to give a good understanding of duration gap model used for managing interest rate risk. The article starts with a overview of interest rate risk and explain how this type of risk should be measured and managed within an asset-liability management. Then the articles takes a short look at methods for measuring interest rate risk and after that explains and demonstrates how can be used Duration Gap Model for managing interest rate risk in banks.

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Bibliographic Info

Article provided by Asociatia Generala a Economistilor din Romania - AGER in its journal Theoretical and Applied Economics.

Volume (Year): 1(518) (2008)
Issue (Month): 1(518) (January)
Pages: 3-10

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Handle: RePEc:agr:journl:v:1(518):y:2008:i:1(518):p:3-10

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Related research

Keywords: interest rate; risk; management; assets and liabilities; duration gap; bank; interest rate risk.;

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Cited by:
  1. Carcano, Nicola & Dall'O, Hakim, 2011. "Alternative models for hedging yield curve risk: An empirical comparison," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2991-3000, November.

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