Interest Rate Risk Management using Duration Gap Methodology

Dan Armeanu (), Florentina Balu () and Carmen Obreja
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Carmen Obreja: Academia de Studii Economice, Bucuresti

Theoretical and Applied Economics, 2008, vol. 1(518), issue 1(518), 3-10

Abstract: The world for financial institutions has changed during the last 20 years, and become riskier and more competitive-driven. After the deregulation of the financial market, banks had to take on extensive risk in order to earn sufficient returns. Interest rate volatility has increased dramatically over the past twenty-five years and for that an efficient management of this interest rate risk is strong required. In the last years banks developed a variety of methods for measuring and managing interest rate risk. From these the most frequently used in real banking life and recommended by Basel Committee are based on: Reprising Model or Funding Gap Model, Maturity Gap Model, Duration Gap Model, Static and Dynamic Simulation. The purpose of this article is to give a good understanding of duration gap model used for managing interest rate risk. The article starts with a overview of interest rate risk and explain how this type of risk should be measured and managed within an asset-liability management. Then the articles takes a short look at methods for measuring interest rate risk and after that explains and demonstrates how can be used Duration Gap Model for managing interest rate risk in banks.

Keywords: interest rate; risk; management; assets and liabilities; duration gap; bank; interest rate risk. (search for similar items in EconPapers)
Date: 2008
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