Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-23T18:37:51.305Z Has data issue: false hasContentIssue false
  • English
  • Français

The Valuation and Hedging of Variable Rate Savings Accounts

Published online by Cambridge University Press:  17 April 2015

Frank de Jong  and
Jacco Wielhouwer
Frank de Jong
Affiliation:
Finance Group, Universiteit van Amsterdam, Roetersstraat 11, 1018 WB, Amsterdam, the Netherlands, Phone: +31-20-5255815, Fax: +31-20-5255285, Email: [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Variable rate savings accounts have two main features. The interest rate paid on the account is variable and deposits can be invested and withdrawn at any time. However, customer behaviour is not fully rational and withdrawals of balances are often performed with a delay. This paper focuses on measuring the interest rate risk of variable rate savings accounts on a value basis (duration) and analyzes the problem how to hedge these accounts. In order to model the embedded options and the customer behaviour we implement a partial adjustment specification. The interest rate policy of the bank is described in an error-correction model.

Keywords

Term structuredurationuncertain cash flowvariable rates of returnC33E43
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 33 , Issue 2 , November 2003 , pp. 383 - 397
Copyright
Copyright © ASTIN Bulletin 2003

Footnotes

1

University of Amsterdam

2

ING Group and CentER, Tilburg University

References

Bierwag, G.O. (1987) Duration Analysis, Ballinger, Cambridge MA.Google Scholar
Davidson, J., Hendry, D.F., Srba, F. and Yeo, S. (1978) Econometric Modelling of the Aggregate Time Series Relationship between Consumer' Expenditure and Income in the United Kingdom, Economic Journal, 88, 661–692.CrossRefGoogle Scholar
Heath, D., Jarrow, R. and Morton, A. (1992) Bond pricing and the term structure of interest rates: A new methodology for contingent claims valuation, Econometrica 60, 77–106.CrossRefGoogle Scholar
Ho, T.S.Y. and Lee, S.-B. (1986) Term structure movements and the pricing of interest rate contingent claims, Journal of Finance 41, 1011–1029.CrossRefGoogle Scholar
Hull, J. (1993) Options, Futures and other Derivative Securities, second edition, Prentice-Hall.Google Scholar
Hutchison, D.E. and Pennacchi, G.G. (1996) Measuring Rents and Interest Rate Risk in Imperfect Financial Markets: The Case of Ratail Bank Deposits, Journal of Financial and Quantitative Analysis 31, 401–417.CrossRefGoogle Scholar
Janosi, T., Jarrow, R. and Zullo, F. (1999) An Empirical Analysis of the Jarrow-van Deventer Model for Valuing Non-Maturity Demand Deposits, Journal ofDerivatives, Fall 1999, 8–31.CrossRefGoogle Scholar
Jarrow, R.A., and van Deventer, D.R. (1998) The arbitarge-free valuation and hedging of savings accounts and credit card loans, Journal of Banking and Finance 22, 249–272.CrossRefGoogle Scholar
Selvaggio, R.D. (1996) Using the OAS Methodology to Value and Hedge Commercial Bank Retail Demand Deposit Premiums, Chapter 12 363–373.Google Scholar
Vasicek, O. (1977) An equilibrium characterization of the term structure, Journal of Financial Economics 5, 177–188.CrossRefGoogle Scholar