Interest Rate Risk Management using Duration Gap Methodology
AbstractThe 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 InfoArticle 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)
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interest rate; risk; management; assets and liabilities; duration gap; bank; interest rate risk.;
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- 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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