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Modelling Retail Deposit Spreads in the UK

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Author Info

  • Frank Skinner

    ()
    (ICMA Centre, University of Reading)

  • Benton E. Gup

    (University of Alabama)

  • Michael Ioannides

    (School of Business, Rutgers University, NJ, USA)

  • Doowoo Nam

    (College of Business, The University of Southern Mississippi)

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    Abstract

    Models that are based on mean-variance analysis seek portfolio weights to minimise the variance of the portfolio for a given level of return. The portfolio variance is measured using a covariance matrix that represents the volatility and correlation of asset returns. However these matrices are notoriously difficult to estimate and ad hoc methods often need to be applied to limit or smooth the mean-variance efficient allocations that are recommended by the model. Moreover the mean-variance criterion has nothing to ensure that tracking errors are stationary. Although the portfolios will be efficient, the tracking errors will in all probability be random walks. Therefore the replicating portfolio can drift very far from the benchmark unless it is frequently re-balanced.

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    Bibliographic Info

    Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-02.

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    Length: 24 pages
    Date of creation: Aug 2001
    Date of revision:
    Handle: RePEc:rdg:icmadp:icma-dp2001-02

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    Related research

    Keywords: Deposits; yield Cruves; Stochastic Interest Rates;

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    References

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    1. Allen, Linda & Saunders, Anthony & Udell, Gregory F., 1991. "The pricing of retail deposits: Concentration and information," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 335-361, December.
    2. Chang Eric C. & Moon-Whoan Rhee & Kit Pong Wong, 1995. "A note on the spread between the rates of fixed and variable rate loans," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1479-1487, November.
    3. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. Hannan, Timothy H, 1991. "Foundations of the Structure-Conduct-Performance Paradigm in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 68-84, February.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
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