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Modelling Retail Deposit Spreads in the UK


  • 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)


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.

Suggested Citation

  • Frank Skinner & Benton E. Gup & Michael Ioannides & Doowoo Nam, 2001. "Modelling Retail Deposit Spreads in the UK," ICMA Centre Discussion Papers in Finance icma-dp2001-02, Henley Business School, Reading University.
  • Handle: RePEc:rdg:icmadp:icma-dp2001-02

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    References listed on IDEAS

    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    2. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    3. 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.
    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. 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.
    6. 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.
    7. Roswell E. Mathis III & Gerald O. Bierwag, 1999. "Pricing Eurodollar futures options with the Ho and Lee and Black, Derman, and Toy models: An empirical comparison," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(3), pages 291-306, May.
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    More about this item


    Deposits; yield Cruves; Stochastic Interest Rates;

    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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