Modelling Retail Deposit Spreads in the UK
AbstractModels 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 InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-02.
Length: 24 pages
Date of creation: Aug 2001
Date of revision:
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Deposits; yield Cruves; Stochastic Interest Rates;
Find related papers by JEL classification:
- G2 - Financial Economics - - Financial Institutions and Services
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- 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.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- 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.
- 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.
- 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.
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