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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]
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Abstract

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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 The interest rate paid on the account is variable and deposits can be invested and withdrawn at any time.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

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