Banks' interest rate risk: the net interest income perspective versus the market value perspective

Christoph Memmel

Quantitative Finance, 2014, vol. 14, issue 6, 1059-1068

Abstract: We use portfolios of passive investment strategies to replicate the interest risk of banks' banking books. The following empirical statements are derived. (i) Changes in banks' market value and in their net interest income are highly correlated, irrespective of the banks' portfolio composition. (ii) However, banks' portfolio composition has a huge impact on the ratio of changes in net interest income relative to changes in market value. These results are important for the design and interpretation of interest rate stress tests for banks.

Date: 2014
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DOI: 10.1080/14697688.2011.630326

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