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Non-maturing Deposits, Convexity and Timing Adjustments

In: Operations Research Proceedings 2007

Author

Listed:
  • Oliver Entrop

    (Catholic University of Eichstätt-Ingolstadt)

  • Marco Wilkens

    (Catholic University of Eichstätt-Ingolstadt)

Abstract

One key driver of a bank’s total interest rate risk is the position of non-maturing deposits. Several papers such as [6], [8], and [7] value non-maturing deposits in an arbitrage-free framework and analyze their risk profile. All these models consist of three major components: first, the short rate process, i.e. the dynamics of the default-free interest rate term structure; second, the interest rate pass-through, i.e. the link between the development of the deposit rates and the development of default-free interest rates, in general the short rate; third, the development of the deposit volume over time. In this paper, we concentrate on the interest rate pass-through. We provide some term structure model-free results on the valuation of deposits, when the deposit rates are linearly linked to some long-term swap rate (rather than a short-term interest rate) as the reference rate with an unnatural time lag.

Suggested Citation

  • Oliver Entrop & Marco Wilkens, 2008. "Non-maturing Deposits, Convexity and Timing Adjustments," Operations Research Proceedings, in: Jörg Kalcsics & Stefan Nickel (ed.), Operations Research Proceedings 2007, pages 263-268, Springer.
    • Handle: RePEc:spr:oprchp:978-3-540-77903-2_41
    DOI: 10.1007/978-3-540-77903-2_41
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