Management of Non-Maturing Deposits by Multistage Stochastic Programming
Type
applied research project
Start Date
01 July 1993
End Date
31 December 2002
Status
completed
Keywords
non-maturing accounts
variable-rate mortgages
prepayment risk
savings account deposits
withdrawal option
multistage stochastic programming
Description
Classic 'non-maturing accounts' like savings or variable-rate mortgages can represent a significant percentage in a banks? balance. The risk management of these accounts is complicated by the embedded withdrawal options that may be exercised by account holders. In cooperation with a leading Swiss bank, a multistage stochastic optimization model has been developed which transforms a non-maturing account position into a combination of standard fixed-income instruments. The implementation of this model led to a software package applicable for a periodic decision making: minimization of refinancing costs or, vice versa, maximization of reinvestment incomes given an initial non-maturing account position).
Leader contributor(s)
Funder(s)
Division(s)
Eprints ID
7261

Filters

Reset filters

Settings
Now showing 1 - 4 of 4
No Thumbnail Available
Publication

Stochastic Optimization in Asset & Liability Management: A Model for Non-Maturing Accounts

2001 , Frauendorfer, Karl , Schürle, Michael , Ziemba, W.T. , Mulvey, J.M.

View
No Thumbnail Available
Publication

A Stochastic Optimization Model for the Investment of Savings Account Deposits

1997-09-03 , Forrest, Bruce , Frauendorfer, Karl , Schürle, Michael

A bank's financial management faces various sources of uncertainty when funds from savings account deposits are invested in the marketplace. Future interest rates are unknown and customers are allowed to withdraw their deposits at any point in time. The objective is to find a portfolio of fixed income instruments that maximizes the bank's interest surplus from the investment of funds and to manage the prepayment risk inherent to non-maturing accounts. A multistage stochastic programming model is presented that takes into account the uncertain evolution of interest rates and volume. A case study based on interest rate data of a 7 years period indicates that the surplus can be increased by 25 basis points compared to the static approach formerly used, while volatility is reduced significantly.

View
No Thumbnail Available
Publication

Barycentric Approximation of Stochastic Interest Rate Processes

1998 , Frauendorfer, Karl , Schürle, Michael , Mulvey, J.M. , Ziemba, W.T.

The incorporation of single-factor interest rate models within the stochastic programming methodology is investigated and applied to multiperiod investment. Barycentric approximation is used for discretizing the stochastic factors and for generating scenario trees which take the various term structure movements into account. It is shown that employing the Vasicek model for the instantaneous rate process preserves convexity of the stochastic multistage program and, hence, guarantees information on the accuracy of the approximate investment strategies. To the contrary, the convexity of the program cannot be assessed if the square root process due to Cox-Ingersoll-Ross is used for the instantaneous rate. In this case, the approximate investment policies and their associated interest surplus may be accepted as estimates. Numerical results for 8-period and 6-period investment problems are discussed.

View
No Thumbnail Available
Publication

Modeling client rate and volumes of non-maturing accounts

2010 , Paraschiv, Florentina , Schürle, Michael

In this paper we develop models for the client rate and the volumes of non-maturing accounts. We test the hypothesis that movements in the client rate are dependent upon the market rates regime. We find that the responsiveness of the client rate is symmetric to changes in the short rate, but asymmetric to changes in the longer market rates. Furthermore, the speed of adjustment of the client rate is faster when there is substantial deviation from the equilibrium relationship linking client rate and market rates. We also show that volumes can be explained by the spread between the client rate and the market rates.

View