Networth exposure to interest rate risk: An empirical analysis of Indian commercial banks
AbstractIn the Basel II era, management of interest rate risk in the banking book has become significant. In the first study of its kind, we develop a simulation based driver-driven approach to estimate the impact of interest rate volatility on the networth of Indian banks during the period 2002-2004. We derive the interest rates that drive changes in deposit and prime lending rates (PLR). Then we perform Monte Carlo simulation and multiple regressions, on these driver rates, to obtain simulated shocks to deposit rates and PLR. We use these simulated shocks to get the 99% worst EVE loss for the sample banks. These losses are much larger than what the existing literature suggests. This is because, apart from repricing risk, we are the first to find evidence of significant basis risk. Our results have important policy implications both for banks and regulators.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal European Journal of Operational Research.
Volume (Year): 193 (2009)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eor
Interest rate risk in banks Risk management Simulation Driver-driven variables;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
- Wetmore, Jill L. & Brick, John R., 1998. "The Basis Risk Component of Commercial Bank Stock Returns," Journal of Economics and Business, Elsevier, vol. 50(1), pages 67-76, January.
- Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
- International Monetary Fund, 2004. "Interest Rate Volatility and Risk in Indian Banking," IMF Working Papers 04/17, International Monetary Fund.
- Flannery, Mark J, 1981. "Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(5), pages 1085-1101, December.
- Granger, C. W. J., 1980. "Testing for causality : A personal viewpoint," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 329-352, May.
- Flannery, Mark J & James, Christopher M, 1984.
"Market Evidence on the Effective Maturity of Bank Assets and Liabilities,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 16(4), pages 435-45, November.
- Mark Flannery & Christopher James, . "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Rodney L. White Center for Financial Research Working Papers 5-83, Wharton School Rodney L. White Center for Financial Research.
- Mark Flannery & Christopher James, . "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Rodney L. White Center for Financial Research Working Papers 05-83, Wharton School Rodney L. White Center for Financial Research.
- Flannery, Mark J, 1983. "Interest Rates and Bank Profitability: Additional Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 355-62, August.
- Quémard, J L. & Golitin, V., 2005. "Interest rate risk in the French banking system," Financial Stability Review, Banque de France, issue 6, pages 81-94, June.
- Mitra, Sovan & Date, Paresh & Mamon, Rogemar & Wang, I-Chieh, 2013. "Pricing and risk management of interest rate swaps," European Journal of Operational Research, Elsevier, vol. 228(1), pages 102-111.
- Ozer, Muammer, 2011. "Understanding the impacts of product knowledge and product type on the accuracy of intentions-based new product predictions," European Journal of Operational Research, Elsevier, vol. 211(2), pages 359-369, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.