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Modelling Retail Deposit Spreads in the UK

Author

Listed:
  • Frank Skinner

    (ICMA Centre, University of Reading)

  • Benton E. Gup

    (University of Alabama)

  • Michael Ioannides

    (School of Business, Rutgers University, NJ, USA)

  • Doowoo Nam

    (College of Business, The University of Southern Mississippi)

Abstract

Models that are based on mean-variance analysis seek portfolio weights to minimise the variance of the portfolio for a given level of return. The portfolio variance is measured using a covariance matrix that represents the volatility and correlation of asset returns. However these matrices are notoriously difficult to estimate and ad hoc methods often need to be applied to limit or smooth the mean-variance efficient allocations that are recommended by the model. Moreover the mean-variance criterion has nothing to ensure that tracking errors are stationary. Although the portfolios will be efficient, the tracking errors will in all probability be random walks. Therefore the replicating portfolio can drift very far from the benchmark unless it is frequently re-balanced.Â

Suggested Citation

  • Frank Skinner & Benton E. Gup & Michael Ioannides & Doowoo Nam, 2001. "Modelling Retail Deposit Spreads in the UK," ICMA Centre Discussion Papers in Finance icma-dp2001-02, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2001-02
    as

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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2001-02.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Deposits; yield Cruves; Stochastic Interest Rates;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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