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On the risk relation between Economic Value of Equity and Net Interest Income
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2017 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Ekonomiskt Värde av Eget Kapital-risk samt Räntenettorisk och sambandet dem emellan (Swedish)
Abstract [en]

The Basel Committee has proposed a new Pillar 2 regulatory framework for evaluating the interest rate risk of a bank's banking book appropriately called Interest Rate Risk in the Banking Book. The framework requires a bank to use and report two different interest rate risk measures: Economic Value of Equity (EVE) risk and Net Interest Income (NII) risk. These risk measures have previously been studied separately but few models have been proposed to investigate the relationship between them. Based on previous research we assume that parts of the banking book can be approximated using a portfolio strategy of rolling bonds and propose a model for relating the connection between the portfolio maturity structure, EVE risk and NII risk. By simulating from both single- and multi-factor Vasicek models and measuring risk as Expected Shortfall we illustrate the resulting risk profiles. We also show how altering certain theoretical assumptions seem to have little effect on these risk profiles.

Abstract [sv]

Baselkommittén har föreslagit ett nytt Pelare 2-regelverk för att utvärdera ränterisken i en banks bankbok kallat Interest Rate Risk in the Banking Book. Regelverket kräver att en bank beräknar och rapporterar två olika mått på ränterisk: Ekonomiskt Värde av Eget Kapital-risk (EVE-risk) samt Räntenettorisk (NII-risk). Dessa två mått har tidigare studerats separat men få modeller har föreslagits för att studera relationen dem emellan. Baserat på tidigare forskning så antar vi att delar av bankboken kan approximeras som en rullande obligationsportfölj och föreslår en modell för att relatera sambandet mellan portföljens löptidsstruktur, EVE-risk och NII-risk. Genom att simulera korträntor från Vasicek-modeller med olika antal faktorer så undersöker vi de resulterande riskerna mätt som Expected Shortfall. Vi visar också att vissa av de teoretiska antagandena verkar ha liten påverkan på riskprofilen.

Place, publisher, year, edition, pages
2017.
Series
TRITA-MAT-E, 2017:23
National Category
Computational Mathematics
Identifiers
URN: urn:nbn:se:kth:diva-208175OAI: oai:DiVA.org:kth-208175DiVA: diva2:1106224
External cooperation
Handelsbanken
Subject / course
Financial Mathematics
Educational program
Master of Science - Industrial Engineering and Management
Supervisors
Examiners
Available from: 2017-06-07 Created: 2017-06-07 Last updated: 2017-06-07Bibliographically approved

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CiteExportLink to record
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