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Measuring Interest Rate Risk Management by Financial Institutions

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Abstract

Financial intermediaries manage myriad interest rate risk exposures. We propose a new method to measure financial intermediaries' residual interest rate risk using high-frequency financial market data. Our method exploits all available high-frequency information and is valid under extremely weak assumptions. Applying the method to U.S. life insurers, we find their interest rate risk management strategies are generally effective. However, life insurers are more sensitive to changes in long-term interest rates than property and casualty insurers. We show that the term premium helps to explain the difference in sensitivities between the two types of insurer.

Suggested Citation

  • Celso Brunetti & Nathan Foley-Fisher & Stéphane Verani, 2023. "Measuring Interest Rate Risk Management by Financial Institutions," Finance and Economics Discussion Series 2023-067, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2023-67
    DOI: 10.17016/FEDS.2023.067
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    1. Nour Meddahi, 2002. "A theoretical comparison between integrated and realized volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 479-508.
    2. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    3. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    4. Elijah Brewer & Thomas H. Mondschean & Philip E. Strahan, 1993. "Why the life insurance industry did not face an \\"S&L-type\\" crisis," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 17(Sep), pages 12-24.
    5. Guillaume Vuillemey, 2019. "Bank Interest Rate Risk Management," Management Science, INFORMS, vol. 65(12), pages 5933-5956, December.
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    More about this item

    Keywords

    Financial institutions; Interest rate risk management; High-frequency financial econometrics; Subsampling; Life insurers;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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