A Stochastic Optimization Model for the Investment of Savings Account Deposits

A bank's financial management faces various sources of uncertainty when funds from savings account deposits are invested in the marketplace. Future interest rates are unknown and customers are allowed to withdraw their deposits at any point in time. The objective is to find a portfolio of fixed income instruments that maximizes the bank's interest surplus from the investment of funds and to manage the prepayment risk inherent to non-maturing accounts. A multistage stochastic programming model is presented that takes into account the uncertain evolution of interest rates and volume. A case study based on interest rate data of a 7 years period indicates that the surplus can be increased by 25 basis points compared to the static approach formerly used, while volatility is reduced significantly.