 Evaluating the validity of regulatory interest rate risk measures – a simulation approachCatharina Claußen and Daniel Platte Journal of Banking & Finance, 2023, vol. 154, issue C Abstract: This paper assesses the validity of changes in the economic value of equity (EVE) and the net interest incom (NII) as regulatory risk measures for a bank’s interest rate risk in the banking book. We develop a novel simulation approach and evaluate the measures retrospectively from the time of a bank’s default as a consequence of stressed market interest rates. Our results show that both measures significantly indicate inherent interest rate risk. We find the EVE to be a robust and conclusive risk measure, whereby the results concerning the NII measure are against the economic intuition, less robust, and might depend on the prevailing level of interest rates. Further, we derive critical values of quarterly changes in risk measures serving as indicators for substantial risk levels. Our findings validate the EVE and contribute to a thorough understanding of the risk measures. Keywords: Interest rate risk; Banking regulation; Economic value; Net interest income; Stress testing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426623001383 DOI: 10.1016/j.jbankfin.2023.106933 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.