ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

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The Valuation and Hedging of Non-Maturity Deposits In Multi-Factor Interest Rate Models[1]

10/21/2022 09:09 AM

Source: Wall Street Journal, September 13, 2022

 Robert A. Jarrow, Stas Melnikov, Warren Sherman, Donald R. van Deventer and Martin Zorn

  • First Version: September 15, 2022
  • This Version: October 21, 2022

Financial institutions in all major sectors of the financial services business analyze and often hedge interest rate risk and other risks on a mark-to-market basis, as best practice financial economics prescribes. In commercial banking, however, one important liability type has proven problematic despite nearly 30 years of research on this liability: bank deposits with no explicit maturity. Deposit types which fall in the “non-maturity category” include demand deposits, many types of savings deposits, and a wide variety of unique deposit types that vary from country to country. This note extends previous modeling efforts to provide an explicit discrete valuation formula and framework that is valid for any number of factors driving the risk-free yield curve and for any no-arbitrage choice of interest rate volatilities, whether they be constant or stochastic, typically driven by the level of interest rates.

A copy of the full paper is attached here:

InterestRateSensitivityNonMaturityDeposits2022v5

Footnotes:

[1] Copyright 1990-2022 by SAS Institute Inc.  All rights reserved.

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

Read More