On the risk management of demand deposits: quadratic hedging of interest rate margins

• Published in: Annals of operations research Vol. 313; no. 2; pp. 1319 - 1355
• Main Authors: Adam, Alexandre, Cherrat, Hamza, Houkari, Mohamed, Laurent, Jean-Paul, Prigent, Jean-Luc
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.06.2022; Springer; Springer Nature B.V; Springer Verlag
• Subjects: Accounting; Analysis; Balance sheets; Bank deposits; Banking industry; Banks; Business and Management; Combinatorics; Computational Finance; Deposits; Expected values; Fair value; Hedging; Hedging (Finance); Interest rates; Liability; Methods; Operations research; Operations Research/Decision Theory; Quantitative Finance; Risk Management; S.I.: Risk Management Decisions and Value under Uncertainty; Securities markets; Stochastic processes; Theory of Computation; Volatility; France; Quadratic hedging; Demand deposits; Interest rate margins; Risk management

This paper examines the problem of hedging banks interest rate margins. We assume that the demand’s deposits follow an exponential Lévy process with potential jumps. The forward market rates are assumed to follow the standard market model introduced by Brace et al. (Math Finance 7(2):127–155, 1997)....