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Management of non-maturing deposits by multistage stochastic programming

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abstract The management of non-maturing account positions in a bank's balance like savings and sight deposits as well as certain types of variable-rate mortgages is complicated by the embedded options that its clients may exercise. In addition to the usual interest rate risk, uncertainty in the timing and amount of cash flows must be taken into account when investment or refinancing strategies are determined. This paper introduces a multistage stochastic programming model where the stochastic evolution of interest rates and volume under management is described by stochastic processes in discrete time. Scenarios are generated by means of barycentric approximation which is particularly useful to deal with the observed correlations between interest rates and volume. Practical experience from the application at a major Swiss bank is reported where the model has been employed since the mid-90s.
   
type journal paper
   
keywords Multistage Stochastic Programming, Asset & Liability Management, Barycentric Approximation, Non-Maturing Assets & Liabilities
   
project Management of Non-Maturing Deposits by Multistage Stochastic Programming
language English
kind of paper journal article
date of appearance 16-12-2003
journal European Journal of Operational Research
publisher Elsevier B.V. (Amsterdam, NL)
ISSN 0377-2217
ISSN (online) 0377-2217
volume of journal 151
number of issue 3
page(s) 602-616
review double-blind review
   
citation Frauendorfer, K., & Schürle, M. (2003). Management of non-maturing deposits by multistage stochastic programming. European Journal of Operational Research, 151(3), 602-616.