Interest Rate Risk of Banking Accounts: Measurement Using the VaR Framework
AbstractIn order to measure the interest rate risk of banking accounts such as deposits and loans, this paper extends the value at risk (hereafter, VaR) analysis framework, which is useful for the risk evaluation of trading accounts. In order to apply the VaR concept derived from trading accounts to banking accounts, we should take into account the following issues: (1) the longer risk evaluation period because of the inflexibility of adjustability of banking account positions; (2) the evaluation of risk included in the administered rates (the long-term prime rate and the short-term prime rate); and (3) the prepayment risk (associated with housing loans, etc.). Therefore, in this paper we first construct a VaR model including a term-structure model to express the stochastic process of market rate, the administered rate model, and the prepayment function model. Then, we perform a simulation using an imaginary portfolio to analyze the factors determining interest rate risk. In conclusion, it has been proved that the factor of administered rates increases interest rate risk both in single products and in a portfolio. Taking into account the behavior of customers who want better interest rate conditions, the factor of prepayment decreases the present value, which is itself the basis of calculating risk. Finally, we perform a sensitivity analysis of model parameters to show the magnitude of model risk.
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.
Bibliographic InfoArticle provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 16 (1998)
Issue (Month): 1 (May)
Contact details of provider:
Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken).
If references are entirely missing, you can add them using this form.