A multi-factor model for the valuation and risk management of ...

TABLE OF CONTENTS
I. INTRODUCTION ............................................................................................................................. 1
II. THE MODEL .................................................................................................................................. 3
2.1 Framework: no-arbitrage valuation of economic rents ....................................................... 3
2.2 The joint yield curve deposit rate model ............................................................................ 4
2.3 Literature review ................................................................................................................. 9
III. EMPIRICAL IMPLEMENTATION AND ESTIMATION RESULTS ............................................................... 10
3.1 Data .................................................................................................................................. 10
3.2 Estimation method ........................................................................................................... 12
3.3 Estimation results ............................................................................................................. 13
3.3.1 Joint yield curve deposit rate model estimates ..................................................... 13
3.3.2 Deposit premium and interest rate elasticity estimates ........................................ 15
3.4 Results based on a dynamic replicating portfolio approach ............................................ 19
IV. POLICY IMPLICATIONS ................................................................................................................. 21
V. CONCLUSIONS ........................................................................................................................... 23
References ...................................................................................................................................... 25
Figures ............................................................................................................................................. 28
Appendix .......................................................................................................................................... 35
National Bank of Belgium - Working paper series............................................................................ 37
NBB WORKING PAPER No. 83 - MAY 2006