Free Download PDF A Guide to Behavioural Modelling

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make the necessary checks for a proper definition, development and
implementation of the model when it is used for liquidity risk, interest rate
risk and business purposes.
Chapter 7, by Serena Di Rienzo, then reviews the literature on the two
main approaches – the economic value and the replicating portfolio
framework – which differ in both methodology and objective. The key
difference is their perspective, since the first aims to determine the economic
value of NMDs to allow a proper valuation of the risk and hedging of the
position, while the second is focused on the creation of a risk-balanced and
profitable investment strategy using NMDs.
In Chapter 8, Andreas Blöchlinger describes one of the first econometric
models that is useful from marketing to the hedging strategy. It develops a
coherent framework for NMDs, including the evolution of interest rates,
bank’s pricing behaviour, and customers’ withdrawal and prepayment
behaviour to derive a hedging strategy that generates a stable net interest
income. Chapter 9, by Rosa Cocozza, Domenico Curcio and Igor
Gianfrancesco, then describes a simple econometric model for the purpose of
managing interest rate risk. It shows how the NMDs volume can be easily
modelled into the regulatory time bands used in the maturity ladder, and the
pass-through of the bank can be estimated using a well-known econometric
technique.
Francesco Frascarelli and Vanessa Pagliaccia illustrate in Chapter 10 an
advanced econometric model that considers the customer’s demand for
money, composed by NMDs and other types of financial wealth whose
allocation depends on the financial markets. The model integrates customers’
asset allocation with the dynamics of the financial markets with the purpose
of forecasting both the liquidity and interest rate risk position. Chapter 11, by
Antonio Castagna, Antonio Scaravaggi and Bernardo Rapagnetta, then
presents an application of a stochastic risk factor model that integrates the
liquidity, profitability and interest rate risk. The model was calibrated to
artificial data to show that the heterogeneity of the NMDs dynamics and
customer’s behaviour can be modelled using this unique framework.
In Chapter 12, Bogusz Stankiewicz describes an empirical application of
how an NMD behavioural model can be used by banks’ marketing
departments. In particular, the model provides an understanding of how
modelling can contribute to an increase in business value. Following that,
Chapter 13 by Marco Palumbo presents a step-by-step approach for
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