Financial Intermediaries and Interest Rate Risk: Ii

48 Pages Posted: 17 Nov 2006

See all articles by Sotiris K. Staikouras

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Abstract

The current work extends and updates the previous survey (Staikouras, 2003) by looking at other aspects of the financial institutions' yield sensitivity. The study starts with an extensive discussion of the origins of asset-liability management and the subsequent work to identify effective ways of measuring and managing interest rate risk. The discussion implicates both regulatory and market-based approaches along with any issues surrounding their applicability. The literature is enriched by recognizing that structural and regulatory shifts affect financial institutions in different ways depending on the size and nature of their activities. It is also noted that such shifts could change the bank's riskiness, and force banks to adjust their balance sheet size by altering their maturity intermediation function. Besides yield changes, market cycles are also held responsible for asymmetric effects on corporate values. Furthermore, nonstandard investigations are considered, where embedded options and basis risk are significant above and beyond the intermediary's rate sensitivity, while shocks to the slope of the yield curve is identified as a new variable. When the discount privilege is modeled as an option, it is shown that its value is incorporated in the equities of qualifying banks. Finally, volatility clustering is further established while constant relative risk aversion is not present in the U.S. market. Although some empirical findings may be quite mixed, there is a general consensus that all forms of systematic risk, risk premia, and the risk-return trade-off do exhibit some form of variability, not only over time but also across corporate sizes and segments.

Suggested Citation

Staikouras, Sotiris, Financial Intermediaries and Interest Rate Risk: Ii. Financial Markets, Institutions & Instruments, Vol. 15, No. 5, pp. 225-272, December 2006, Available at SSRN: https://ssrn.com/abstract=945527 or http://dx.doi.org/10.1111/j.1468-0416.2006.00118.x

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
17
Abstract Views
1,774
PlumX Metrics