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Managing Risk in Thrift Institutions: Beyond the Duration Cap

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  • Roll, Richard

Abstract

ABSTRACT Managing Risk in Thrift Institutions: Beyond the Duration Gap Even if thrift institutions were exposed only to interest rate risk, gap management using simple duration would be an imperfect method, particularly for callable assets and liabilities. Duration measures interest rate risk for parallel shifts in the yield curve, but actual yield curve shifts should not be, and usually are not, parallel. An alternative to duration is a multi-factor model such as the Arbitrage Pricing Model, (APT). An empirical investigation of a sample of large thrifts disclosed that they are exposed to APT factors such as inflation, investor confidence, and the term structure. The level of thrift exposure to these risk factors is twice that of the average industrial company and thrifts also exhibit an unusually large amount of non-systematic risk.

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  • Roll, Richard, 1987. "Managing Risk in Thrift Institutions: Beyond the Duration Cap," University of California at Los Angeles, Anderson Graduate School of Management qt3329r70t, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt3329r70t
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    Cited by:

    1. Bharati, Rakesh & Nanisetty, Prasad & So, Jacky, 2006. "Dynamic gap transformations: Are banks asset - transformers or brokers? or both?," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 36-52, February.

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