Short and long-term interest rate risk: The sovereign balance-sheet nexus

2019 ◽  
Vol 31 ◽  
Author(s):  
António Afonso ◽  
José Alves
Keyword(s):  
Interest Rate ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Rate Risk ◽  
Short And Long Term

Balance-sheet interest rate risk: a weighted Lp approach

2018 ◽  
Vol 21 (1) ◽  
pp. 91-104 ◽  
Author(s):  
Leslaw Gajek ◽  
Elzbieta Krajewska
Keyword(s):  
Interest Rate ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Rate Risk

scholarly journals Who Bears Interest Rate Risk?

2018 ◽  
Vol 32 (8) ◽  
pp. 2921-2954 ◽  
Author(s):  
Peter Hoffmann ◽  
Sam Langfield ◽  
Federico Pierobon ◽  
Guillaume Vuillemey
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking Sector ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Cross Sectional ◽  
Net Worth ◽  
Loan Rate ◽  
Rate Risk ◽  
European Banking

Abstract We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Evaluation of Banks' Interest Rate Risk: An Alternative Approach

2018 ◽  
Vol 5 (6) ◽  
pp. 111
Author(s):  
Jakob Lichtner ◽  
Marcus Riekeberg ◽  
Friedrich Thiessen ◽  
Thomas Maurer
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Yield Curve ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Bank Loans ◽  
Bank Deposits ◽  
Rate Risk ◽  
Alternative Approach ◽  
Realistic View

Interest rate risk is often assessed through parallel yield curve shifts of 100, 200 or 400 basis points. In order to provide a more realistic view, we did simulations based on periods of growing interest rates that actually occurred in the past. These simulations show that non-bank deposits and non-bank loans react more strongly to rising interest rates than certain interbank and security positions. Existing research usually overestimates related risks slightly as it does not take the interest-elastic reactions of non-banks into account. We found three types of effects. Firstly, the direct earnings effect stems from changed market interest rates applied to constant balance sheet positions. This effect is typically measured by straightforward models. Secondly, to increase accuracy, we identified an indirect earnings effect. Customers react to interest rate changes, and therefore balance sheet positions increase or decrease. The size of this effect depends on how strongly they react, i. e. their interest elasticity. Thirdly, the induced earnings effect results from a bank’s reactions in an attempt to compensate for the changed business volume.

Varying interest rate sensitivity of different property sectors: cross-country evidence from REITs

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yu-Cheng Lin ◽  
Chyi Lin Lee ◽  
Graeme Newell
Keyword(s):  
Interest Rate ◽  
Rate Sensitivity ◽  
Interest Rate Risk ◽  
Pacific Rim ◽  
Content Type ◽  
Rate Risk ◽  
The Pacific ◽  
The Usa ◽  
Short And Long Term ◽  
The Interest Rate

PurposeRecognising that different property sectors have distinct risk-return characteristics, this paper assesses whether changes in the level and volatility of short- and long-term interest rates differentially affected excess returns of sector-specific Real Estate Investment Trusts (REITs) in the Pacific Rim region between July 2006 and December 2018. The strategic property risk management implications for sector-specific REITs are also identified.Design/methodology/approachDaily excess returns between July 2006 and December 2018 are used to analyse the sensitivity in the level and volatility of interest rates for REITs among office, retail, industrial, residential and specialty REITs across the USA, Japan, Australia and Singapore. The generalised autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology is employed to assess the linkage between interest rates and excess returns of sector-specific REITs.FindingsCompared with diversified REITs, sector-specific REITs were less sensitive to short- and long-term interest rate changes across the USA, Japan, Australia and Singapore between July 2006 and December 2018. Of sector-specific REITs, retail and residential REITs were susceptible to interest rate movements over the full study period. On the other hand, office and specialty REITs were generally less sensitive to changes in the level and volatility of short- and long-term interest rate series across all markets in the Pacific Rim region. However, the interest rate sensitivity of industrial REITs was somewhat mixed. This sector was sensitive to interest rate movements, but no comparable evidence was found since the onset of GFC.Practical implicationsThe insignificant exposure to interest rate risk of sector-specific REITs may imply that they have a stronger interest rate risk aversion and greater hedging benefits than their diversified counterparts, particularly for office and specialty REITs. The results support the existence of REIT specialisation value in the Pacific Rim region from the interest rate risk management perspective. This is particularly valuable to international property investors constructing and managing portfolios with REITs in the region. Property investors are advised to be aware of the disparities in the magnitude and direction of sensitivity to the interest rate level and volatility of REITs across different property sectors and various markets in the Pacific Rim region. This study is expected to enhance property investors' understanding of interest rate risk management for different property types of REITs in local, regional and international investment portfolios.Originality/valueThe study is the first to assess the interest rate sensitivity of REITs across different property sectors and various markets in the Pacific Rim region. More importantly, this is the first paper to offer empirical evidence on the existence of specialisation value in the Pacific Rim REIT markets from the aspect of interest rate sensitivity. This research may enhance property investors' understanding of the varying interest rate sensitivity of different property types of REITs across the USA, Japan, Australia and Singapore.

Behavioral analysis of long-term implied volatilities

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Min Xu ◽  
Hong Xie ◽  
Yuehua Wu
Keyword(s):  
Interest Rate ◽  
Implied Volatility ◽  
Market Risk ◽  
Interest Rate Risk ◽  
Risk Capital ◽  
Time Segment ◽  
Underlying Asset ◽  
Content Type ◽  
Rate Risk

Purpose The purpose of this paper is to analyze different behaviors between long-term options’ implied volatilities and realized volatilities. Design/methodology/approach This paper uses a widely adopted short interest rate model that describes a stochastic process of the short interest rate to capture interest rate risk. Price a long-term option by a system of two stochastic processes to capture both underlying asset and interest rate volatilities. Model capital charges according to the Basel III regulatory specified approach. S&P 500 index and relevant data are used to illustrate how the proposed model works. Coup with the low interest rate scenario by first choosing an optimal time segment obtained by a multiple change-point detection method, and then using the data from the chosen time segment to estimate the CIR model parameters, and finally obtaining the final option price by incorporating the capital charge costs. Findings Monotonic increase in long-term option implied volatility can be explained mainly by interest rate risk, and the level of implied volatility can be explained by various valuation adjustments, particularly risk capital costs, which differ from existing published literatures that typically explained the differences in behaviors of long-term implied volatilities by the volatility of volatility or risk premium. The empirical results well explain long-term volatility behaviors. Research limitations/implications The authors only consider the market risk capital in this paper for demonstration purpose. Dealers may price the long-term options with the credit risk. It appears that other than the market risks such as underlying asset volatility and interest rate volatility, the market risk capital is a main nonmarket risk factor that significantly affects the long-term option prices. Practical implications Analysis helps readers and/or users of long-term options to understand why long-term option implied equity volatilities are much higher than observed. The framework offered in the paper provides some guidance if one would like to check if a long-term option is priced reasonable. Originality/value It is the first time to analyze mathematically long-term options’ volatility behavior in comparison with historically observed volatility.

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