A Multi-Factor Model for the Valuation and Risk Management of Demand Deposits

24 Pages Posted: 1 Sep 2005

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Marco Lyrio

Insper Institute of Education and Research

Stan Maes

European Commission - DG Internal market and financial services; European Commission - DG Competition; KU Leuven - Department of Economics

Date Written: June 2006

Abstract

We describe the joint dynamics of bond yields and demand deposit rates employing a multi-factor model in an arbitrage-free framework. Using Monte Carlo simulation, we compute the economic value of demand deposit accounts for deposit-issuing banks. We also investigate how this value is affected by market interest rate changes. Our results show that deposit premiums are statistically significant and quite sensitive to the assumption regarding the evolution of deposit balances over time. Deposit liability values also seem to depreciate significantly when market rates increase, thereby offsetting some of the value losses on the asset side.

Keywords: Demand deposits, affine term structure model, interest rate risk, risk management

JEL Classification: G12, G21

Suggested Citation

Dewachter, Hans and Lyrio, Marco and Maes, Konstantijn, A Multi-Factor Model for the Valuation and Risk Management of Demand Deposits (June 2006). Available at SSRN: https://ssrn.com/abstract=795307 or http://dx.doi.org/10.2139/ssrn.795307

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

Konstantijn Maes (Contact Author)

European Commission - DG Internal market and financial services ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

European Commission - DG Competition ( email )

Place Madou, Madouplein 1
Saint-Josse-ten-Noode/Sint-Joost-ten-Noode
Brussels, B-1049
Belgium

KU Leuven - Department of Economics ( email )

Naamsestraat 69
2nd Floor
B-3000 Leuven
Belgium

HOME PAGE: http://www.econ.kuleuven.ac.be/ew/academic/intecon

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