Panel data modeling of bank deposits

Sofia Costa, Marta Faias (), Pedro Júdice and Pedro Mota
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Sofia Costa: Universidade NOVA de Lisboa
Marta Faias: Universidade NOVA de Lisboa and Centro de Matemática e Aplicações (CMA), NOVA
Pedro Júdice: Montepio Bank and ISCTE Business Research Unit
Pedro Mota: Universidade NOVA de Lisboa and Centro de Matemática e Aplicações (CMA), NOVA

Annals of Finance, 2021, vol. 17, issue 2, No 5, 247-264

Abstract: Abstract Studying the dynamics of deposits is important for three reasons: first, it serves as an important component of liquidity stress testing; second, it is crucial to asset-liability management exercises and the allocation between liquid and illiquid assets; third, it is the support for a Liquidity at Risk methodology. Current models are based on $$\textit{AR}(1)$$ AR ( 1 ) processes that often underestimate liquidity risk. Thus, a bank relying on those models may face failure in an event of crisis. We propose an alternative approach for modeling deposits, using panel data and a momentum term. The model enables the simulation of a variety of deposit trajectories, including episodes of financial distress, showing much higher drawdowns and realistic liquidity at risk estimates, as well as density plots that present a wide range of possible values, corresponding to booms and financial crises. Therefore, this methodology is more suitable for liquidity management at banks, as well as for conducting liquidity stress tests.

Keywords: Bank Deposits; Liquidity; Momentum; Panel data; 60G10; 60G12; 62J05; 62M10; 62P05 (search for similar items in EconPapers)
JEL-codes: C01 G21 G32 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10436-020-00373-1

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