Estimating the Value and Interest Rate Risk of Interest-Bearing Transactions Deposits

Abstract

A valuation model is developed within an interest rate contingent claims framework to estimate NOW account and MMDA premiums and interest rate risk for a sample of commercial banks. As has been previously done, bank deposit rate and balances dynamics are represented by autoregressive processes but with attention given here to alternative specifications and to the deposit rent processes and dynamics implied by these specifications. Alternative deposit rate specifications studied include asymmetric adjustment to market rate changes. In examining the implied deposit rent processes, special attention is given to the importance of distant rent forecasts and forecast dynamics for the deposit premium and interest rate risk estimates.

Keywords: Transactions deposits, valuation, interest rate risk

JEL Classification: G13, G21