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The Valuation and Hedging of Variable Rate Savings Account

Author

Listed:
  • Frank de Jong

    (University of Amsterdam, CEPR)

  • Jacco Wielhouwer

    (ING Group, CentER, Tilburg University)

Abstract

Variable rate savings accounts have two main features. The client rate is variable and deposits can be invested and withdrawn at any time. However, customer behaviour is not fully rational and actions are often performed with a delay. This paper focusses on measuring the interest rate risk of variable rate savings accounts on a value basis (duration) and on the problem how to hedgethese 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

  • Frank de Jong & Jacco Wielhouwer, 2001. "The Valuation and Hedging of Variable Rate Savings Account," Tinbergen Institute Discussion Papers 01-112/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20010112
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    File URL: https://papers.tinbergen.nl/01112.pdf
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    More about this item

    Keywords

    Term structure; duration; uncertain cash flow; variable rates of return;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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