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The Valuation and Hedging of Variable Rate Savings Accounts

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  • de Jong, Frank
  • Wielhouwer, Jacco

Abstract

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 The interest rate paid on the account is variable and deposits can be invested and withdrawn at any time.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

Suggested Citation

  • de Jong, Frank & Wielhouwer, Jacco, 2003. "The Valuation and Hedging of Variable Rate Savings Accounts," ASTIN Bulletin, Cambridge University Press, vol. 33(2), pages 383-397, November.
    • Handle: RePEc:cup:astinb:v:33:y:2003:i:02:p:383-397_01
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    Cited by:

    1. Nyström, Kaj, 2008. "On deposit volumes and the valuation of non-maturing liabilities," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 709-756, March.
    2. Florentina Paraschiv, 2013. "Adjustment Policy of Deposit Rates in the Case of Swiss Non-maturing Savings Accounts," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 3(3), pages 1-19.
    3. Hans Dewachter & Marco Lyrio & Konstantijn Maes, 2006. "A multi-factor model for the valuation and risk managment of demand deposits," Working Paper Research 83, National Bank of Belgium.

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