Maturity Transformation Strategies and Interest Rate Risk of Financial Institutions: Evidence from the German Market

23 Pages Posted: 26 Jul 2007

See all articles by Hendrik Scholz

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Stephan K.H. Simon

McKinsey & Company

Marco Wilkens

University of Augsburg

Date Written: July 25, 2007

Abstract

Economic theory postulates that financial institutions are exposed to a significant interest rate risk which is largely due to their engagement in maturity transformation. Although this maturity transformation and the associated risk is of interest to all stakeholders of financial institutions, it has not yet been well studied. In this study we systematically examine different regression approaches for externally quantifying the exposure to interest rate risk of financial institutions. In this context, we have derived and empirically apply a new and - in economic respects more appropriate - maturity transformation factor. Comparing the explanatory power of different interest rate factors, this maturity transformation factor proves superior. Furthermore, this innovative factor allows us to estimate and interpret the maturity transformation of financial institutions and its respective contribution to total return and risk. All in all, the results obtained for the financial services sector in contrast to non-financial services sectors strongly support Hicks' liquidity preference hypothesis.

Keywords: maturity transformation, interest rate risk, financial institutions, liquidity preference hypothesis

JEL Classification: C52, G12, G21, G22

Suggested Citation

Scholz, Hendrik and Simon, Stephan K.H. and Wilkens, Marco, Maturity Transformation Strategies and Interest Rate Risk of Financial Institutions: Evidence from the German Market (July 25, 2007). Available at SSRN: https://ssrn.com/abstract=1002965 or http://dx.doi.org/10.2139/ssrn.1002965

Hendrik Scholz (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Stephan K.H. Simon

McKinsey & Company ( email )

Sophienstraße 26
Munich, 80333
United States

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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