Balance-sheet interest rate risk: a weighted Lp approach

Leslaw Gajek and Elzbieta Krajewska

Journal of Risk

Abstract: We introduce a new interest rate risk measure that is a product of two factors: one related to the distance between assets and liabilities in the Lp-space of financial instruments, and the other linked to the performance of the financial market. We prove a corresponding immunization inequality, showing that the expected deficit of assets, when compared with liabilities, is bounded from below by a linear function of this measure. We provide comparisons with other interest rate risk measures, such as duration gap and M2 , and give examples of applications to some models of interest rates.

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