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Estimating the value and interest rate risk of interest-bearing transactions deposits

  • James M. O'Brien
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    A valuation model is developed within an interest rate contingent claims framework to estimate NOW account and MMDA premiums and interest rate risk for a sample of commercial banks. As has been previously done, bank deposit rate and balances dynamics are represented by autoregressive processes but with attention given here to alternative specifications and to the deposit rent processes and dynamics implied by these specifications. Alternative deposit rate specifications studied include asymmetric adjustment to market rate changes. In examining the implied deposit rent processes, special attention is given to the importance of distant rent forecasts and forecast dynamics for the deposit premium and interest rate risk estimates.

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    File URL: http://www.federalreserve.gov/pubs/feds/2000/200053/200053abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2000/200053/200053pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-53.

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    Date of creation: 2000
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    Handle: RePEc:fip:fedgfe:2000-53
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    1. James, Christopher M & Wier, Peggy, 1987. "Returns to Acquirers and Competition in the Acquisition Market: The Case of Banking," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 355-70, April.
    2. Charles Kahn & George Pennacchi & Ben Sopranzetti, 1999. "Bank Deposit Rate Clustering: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2185-2214, December.
    3. James O'Brien & Athanasios Orphanides & David Small, 1994. "Estimating the interest rate sensitivity of liquid retail deposit values," Proceedings 42, Federal Reserve Bank of Chicago.
    4. Whitesell, William C, 1992. "Deposit Banks and the Market for Payment Media," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 483-98, November.
    5. James A. Berkovec & J. Nellie Liang, 1991. "Deposit premiums of failed banks: implications for the values of deposits and bank franchises," Proceedings 338, Federal Reserve Bank of Chicago.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1979. "Duration and the Measurement of Basis Risk," The Journal of Business, University of Chicago Press, vol. 52(1), pages 51-61, January.
    7. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May.
    8. Hutchison, David E, 1995. "Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 217-31, February.
    9. Mitchell Berlin & Loretta J. Mester, 1997. "Deposits and relationship lending," Working Papers 96-18, Federal Reserve Bank of Philadelphia.
    10. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May.
    11. Claus Munk, 1999. "Stochastic duration and fast coupon bond option pricing in multi-factor models," Review of Derivatives Research, Springer, vol. 3(2), pages 157-181, May.
    12. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
    13. James A. Berkovec & John J. Mingo & Xuechun Zhang, 1997. "Premiums in private versus public bank branch sales," Finance and Economics Discussion Series 1997-33, Board of Governors of the Federal Reserve System (U.S.).
    14. Michael J. Dueker, 2000. "Are prime rate changes asymmetric?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 33-40.
    15. Jarrow, Robert A. & van Deventer, Donald R., 1998. "The arbitrage-free valuation and hedging of demand deposits and credit card loans," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 249-272, March.
    16. Hutchison, David E. & Pennacchi, George G., 1996. "Measuring Rents and Interest Rate Risk in Imperfect Financial Markets: The Case of Retail Bank Deposits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 399-417, September.
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