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1
Longstaff, Francis A. "Hedging Interest Rate Risk with Options on Average Interest Rates." Journal of Fixed Income 4, no. 4 (March 31, 1995): 37–45. http://dx.doi.org/10.3905/jfi.1995.408126.
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C. Prabhavathi, C. Prabhavathi. "Impact of Interest Rate Risk In Banking System." Indian Journal of Applied Research 3, no. 6 (October 1, 2011): 314–16. http://dx.doi.org/10.15373/2249555x/june2013/105.
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Hoffmann, Peter, Sam Langfield, Federico Pierobon, and Guillaume Vuillemey. "Who Bears Interest Rate Risk?" Review of Financial Studies 32, no. 8 (November 29, 2018): 2921–54. http://dx.doi.org/10.1093/rfs/hhy113.
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Abstract We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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Engel, Charles. "Exchange Rates, Interest Rates, and the Risk Premium." American Economic Review 106, no. 2 (February 1, 2016): 436–74. http://dx.doi.org/10.1257/aer.20121365.
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The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real interest rate countries tend to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two findings have apparently contradictory implications for the relationship of the foreign-exchange risk premium and interest-rate differentials. We document these puzzles, and show that existing models appear unable to account for both. A model that might reconcile the findings is discussed. (JEL E43, F31, G15)
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Chaudron, Raymond F. D. D. "Bank's interest rate risk and profitability in a prolonged environment of low interest rates." Journal of Banking & Finance 89 (April 2018): 94–104. http://dx.doi.org/10.1016/j.jbankfin.2018.01.007.
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Blanchard, Olivier. "Public Debt and Low Interest Rates." American Economic Review 109, no. 4 (April 1, 2019): 1197–229. http://dx.doi.org/10.1257/aer.109.4.1197.
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This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case. (JEL E22, E23, E43, E62, H63)
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Almeida, Caio Ibsen Rodrigues de, Antonio Marcos Duarte Júnior, and Cristiano Augusto Coelho Fernandes. "Interest rate risk measurement in Brazilian sovereign markets." Estudos Econômicos (São Paulo) 34, no. 2 (June 2004): 321–44. http://dx.doi.org/10.1590/s0101-41612004000200004.
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Fixed income emerging markets are an interesting investment alternative. Measuring market risks is mandatory in order to avoid unexpected huge losses. The most used market risk measure is the Value at Risk, based on the profit-loss probability distribution of the portfolio under consideration. Estimating this probability distribution requires the prior estimation of the probability distribution of term structures of interest rates. An interesting possibility is to estimate term structures using a decomposition of the spread function into a linear combination of Legendre polynomials. Numerical examples from the Brazilian sovereign fixed income international market illustrate the practical use of the methodology.
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Maclachlan, Fiona. "Negative interest rates: a Keynesian perspective." Review of Keynesian Economics 7, no. 2 (April 2019): 171–84. http://dx.doi.org/10.4337/roke.2019.02.04.
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One of the most surprising recent developments in financial markets has been the emergence of negative yields on long-term debt. This development contradicts the notion of the zero lower bound which, until recently, was taken as a given in monetary policy discussions. In this paper, I look at the phenomenon of negative yields through the lens of Keynes's liquidity-preference theory of interest. I review changes to the financial market environment that have led to a shift in the liquidity of government bonds relative to bank deposits, and with this empirical context in place, I argue Keynes's theory is consistent with the phenomenon of negative bond yields. Finally, I consider Keynes's thought in relation to a negative interest-rate policy (NIRP) and argue that while he would be opposed to a NIRP as a temporary expedient, a mildly negative policy rate fits with his long-run vision for a world with a zero risk-free long-term interest rate.
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Lichtner, Jakob, Marcus Riekeberg, Friedrich Thiessen, and Thomas Maurer. "Evaluation of Banks' Interest Rate Risk: An Alternative Approach." Applied Economics and Finance 5, no. 6 (October 29, 2018): 111. http://dx.doi.org/10.11114/aef.v5i6.3662.
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Interest rate risk is often assessed through parallel yield curve shifts of 100, 200 or 400 basis points. In order to provide a more realistic view, we did simulations based on periods of growing interest rates that actually occurred in the past. These simulations show that non-bank deposits and non-bank loans react more strongly to rising interest rates than certain interbank and security positions. Existing research usually overestimates related risks slightly as it does not take the interest-elastic reactions of non-banks into account. We found three types of effects. Firstly, the direct earnings effect stems from changed market interest rates applied to constant balance sheet positions. This effect is typically measured by straightforward models. Secondly, to increase accuracy, we identified an indirect earnings effect. Customers react to interest rate changes, and therefore balance sheet positions increase or decrease. The size of this effect depends on how strongly they react, i. e. their interest elasticity. Thirdly, the induced earnings effect results from a bank’s reactions in an attempt to compensate for the changed business volume.
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Feltham, Gerald A., and James A. Ohlson. "Residual Earnings Valuation With Risk and Stochastic Interest Rates." Accounting Review 74, no. 2 (April 1, 1999): 165–83. http://dx.doi.org/10.2308/accr.1999.74.2.165.
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This paper provides a general version of the accounting-based valuation model that equates the market value of a firm's equity to book value plus the present value of expected abnormal earnings. Prior theoretical work (e.g., Ohlson 1995; Feltham and Ohlson 1995, 1996) assumes investors are risk neutral and interest rates are nonstochastic and flat. Our more general analysis rests on only two assumptions: no arbitrage in financial markets and clean surplus accounting. These assumptions imply a risk-adjusted formula for the present value of expected abnormal earnings. The risk adjustments consist of certainty-equivalent reductions of expected abnormal earnings. A key issue deals with the capital charge component of abnormal earnings. It is measured by applying the (uncertain) riskless spot interest rate to start-of-period book value. Risks do not affect the rate used in the capital charge, and accounting policies do not affect the formula's constructs. An application of the general formula shows how the classic risk-adjusted expected cash flows model derives as a special case.
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Baños, David, Marc Lagunas-Merino, and Salvador Ortiz-Latorre. "Variance and Interest Rate Risk in Unit-Linked Insurance Policies." Risks 8, no. 3 (August 6, 2020): 84. http://dx.doi.org/10.3390/risks8030084.
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One of the risks derived from selling long-term policies that any insurance company has arises from interest rates. In this paper, we consider a general class of stochastic volatility models written in forward variance form. We also deal with stochastic interest rates to obtain the risk-free price for unit-linked life insurance contracts, as well as providing a perfect hedging strategy by completing the market. We conclude with a simulation experiment, where we price unit-linked policies using Norwegian mortality rates. In addition, we compare prices for the classical Black-Scholes model against the Heston stochastic volatility model with a Vasicek interest rate model.
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Moiseev, S. R. "Consequences of interest rates benchmarks reform." Voprosy Ekonomiki, no. 1 (January 8, 2020): 93–110. http://dx.doi.org/10.32609/0042-8736-2020-1-93-110.
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The reform of benchmarks is carried out in developed economies from 2014 to 2021. The starting point of a large-scale reform was the scandal with the interest rate LIBOR. Instead of it, national so-called “risk-free” interest rates will appear. Although a problem of manipulating LIBOR will be resolved, new benchmarks bring new problems. They have statistical biases and will not be comparable either to LIBOR or to each other due to methodological differences. The new benchmark rates are overnight rates, and their calculation does not imply the formation of term rates. Instead of the homogeneous LIBOR family, financial markets have received a heterogeneous group of new rates. In some developing economies money markets are absent, and their central banks are faced with a problem of how to calculate the local benchmark rate under the new rules. As an alternative they are searching to use interest rates in neighboring markets.
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Maio, Paulo, and Pedro Santa-Clara. "Short-Term Interest Rates and Stock Market Anomalies." Journal of Financial and Quantitative Analysis 52, no. 3 (June 2017): 927–61. http://dx.doi.org/10.1017/s002210901700028x.
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We present a simple 2-factor model that helps explain several capital asset pricing model (CAPM) anomalies (value premium, return reversal, equity duration, asset growth, and inventory growth). The model is consistent with Merton’s intertemporal CAPM (ICAPM) framework, and the key risk factor is the innovation on a short-term interest rate, the federal funds rate, or the T-bill rate. This model explains a large fraction of the dispersion in the average returns of the joint market anomalies. Moreover, the model compares favorably with alternative multifactor models widely used in the literature. Hence, short-term interest rates seem to be relevant for explaining several dimensions of cross-sectional equity risk premia.
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Evans, Richard W. "Public Debt, Interest Rates, and Negative Shocks." AEA Papers and Proceedings 110 (May 1, 2020): 137–40. http://dx.doi.org/10.1257/pandp.20201101.
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Debt-to-GDP ratios across developed economies are at historically high levels, and government borrowing rates remain persistently low. Blanchard (2019) provides evidence that the fiscal costs and welfare costs are low of increased government debt in low interest rate environments. This paper attempts to replicate Blanchard's main results and tests their robustness to key assumptions about risk in the model. This study finds that Blanchard's stated approach results in no long-run average welfare gains from increased government debt and that those welfare losses are exacerbated if some strong risk-reducing assumptions are relaxed to more realistic values.
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Gubareva, Mariya, and Maria Rosa Borges. "Interest rate, liquidity, and sovereign risk: derivative-based VaR." Journal of Risk Finance 18, no. 4 (August 21, 2017): 443–65. http://dx.doi.org/10.1108/jrf-01-2017-0018.
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Purpose The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration of these risks in the banking book containing sovereign debt. Design/methodology/approach The paper develops the historical derivative-based value at risk (VaR) for assessing the downside risk of a sovereign debt portfolio through the integrated treatment of interest rate and credit risks. The credit default swaps spreads and the fixed-leg rates of interest rate swap are used as proxies for credit risk and interest rate risk, respectively. Findings The proposed methodology is applied to the decade-long history of emerging markets sovereign debt. The empirical analysis demonstrates that the diversified VaR benefits from imperfect correlation between the risk factors. Sovereign risks of non-core emu states and oil producing countries are discussed through the prism of VaR metrics. Practical implications The proposed approach offers a clue for improving risk management in regards to banking books containing government bonds. It could be applied to access the riskiness of investment portfolios containing the wider spectrum of assets beyond the sovereign debt. The approach represents a useful tool for investigating interest rate and credit risk interrelation. Originality/value The proposed enhancement of the traditional historical VaR is twofold: usage of derivative instruments’ quotes and simultaneous consideration of the interest rate and credit risk factors to construct the hypothetical liquidity-free bond yield, which allows to distil liquidity premium.
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Özdemir, Durmus, and Harald Schmidbauer. "INTEREST RATE RISK IN TURKISH FINANCIAL MARKETS ACROSS DIFFERENT TIME PERIODS." Buletin Ekonomi Moneter dan Perbankan 16, no. 3 (September 17, 2014): 183–204. http://dx.doi.org/10.21098/bemp.v16i3.444.
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A Measuring the risk associated with interest rates is important since it is beneficial in taking measures before negative effects can take place in an economy. We obtain a risk measure for interest rates by fitting the generalized Pareto distribution (GPD) to positive extreme day-to-day changes of the interest rate, using data from the Istanbul Stock Exchange (ISE) Second Hand Bond Market, namely Government Bond interest rate closing quotations, for the time period 2001 through 2009. Although the use of the GPD in the context of absolute interest rates is well ocumented in literature, our approach is different insofar and contributes to the literature as changes in interest rates constitute the target of our analysis, reflecting the idea that risk arises from abrupt changes in interest rate rather than in interest rate levels themselves. Our study clearly shows that the GPD, when applied to interest rate changes, provides a good tool for interest rate risk assessment, and permit a period-specific risk evaluation. Keyword: Interest rate risk; covered interest parity; Turkey; generalized Pareto distributionJEL Classification: G1; C1
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Bracha, Anat. "Investment Decisions and Negative Interest Rates." Management Science 66, no. 11 (November 2020): 5316–40. http://dx.doi.org/10.1287/mnsc.2019.3464.
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Prospect Theory’s value function suggests that investors would be risk averse in the gain domain and risk seeking in the loss domain—that is, the reflection effect. However, most of the experimental evidence relies on choice tasks in the gain domain between prospects marked in dollar amounts and considering non-mixed lotteries. There is not much work that examines environments with properties typical in investment decisions where the task is fund allocation involving mixed lotteries with outcomes being rate of return. The recent negative deposit rates in Europe demonstrate the importance of this question and, in particular, understanding investment decisions in the loss domain. This paper fills this gap by using a series of laboratory experiments mimicking these properties of investment decisions with a range of investment amounts and with the money to invest either being earned and literally on the table or not. Yet, no matter the settings, we find no evidence for the reflection effect in investment, and behavior is most consistent with maximizing expected return. This holds regardless of the language used (abstract or not), whether we use a two- or a three-state lottery, whether the task is continuous rather than discrete, or the risky portfolio is a mixed lottery. This paper was accepted by Chen Yan, decision analysis.
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Lazarević, Milan. "Principal component analysis in negative interest rate environment." Acta Oeconomica 69, no. 1 (March 2019): 101–25. http://dx.doi.org/10.1556/032.2019.69.1.6.
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Principal Component Analysis (PCA) is a risk management technique which is, due to the consequences of multicollinearity, particularly suitable to describe the yield curve. Its final results in this segment are presented through three main factors: shift, slope and curvature. They express predictive trajectories and explain over 95% of variability under normal market conditions. The main goal of this paper is to assess whether the established behavioural patterns are observable in the presence of negative interest rates. The EU bond market was used as an empirical basis with respect to the reactions of the European Central Bank and the establishment of negative reference interest rates in the assessed period. The algebraic properties of the principal components in the presence of negative interest rates correspond to the determined directions of movement, except that the slope and curvature have different signs given their diametrically opposite trends. The percentage of variability explained with the help of PCA is lower compared to the normal market conditions and if an equivalent level of approximation is required, it is necessary to include a fourth factor in PCA. This factor is, due to its properties, aptly named oscillatority. An implicit conclusion of our research is that the duration in the conditions of negative interest rates has less useful power in managing the interest rate risk of individual instruments.
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Kregždė, Arvydas, and Gediminas Murauskas. "Impact of sovereign credit risk on the Lithuanian interest rate on loans." Ekonomika 94, no. 2 (January 1, 2015): 113–28. http://dx.doi.org/10.15388/ekon.2015.2.8236.
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The paper deals with banks’ interest rates on loans for non-financial corporations and households in Lithuania. It focuses on the influence of the sovereign credit risk on interest rates for loans. The paper presents an analysis of long-run and short-run relationship between interest rates on loans and the financial market indicators EURIBOR and CDS spread. The application of the cointegration technique has revealed that a change in the CDS spread by 100 basis points has an impact on changes in interest rates on loans by 42 basis points in the long run. No evident relationship between CDS spread and interest rates on loans in a short run has been detected. This shows that market conditions do not play a pivotal role for the banks in setting the interest rates on loans in a short run. Some communalities in interest rates on loans in the Baltic states have been established. The main finding is that the sovereign credit risk of Lithuania, expressed as a CDS spread, has a substantial impact on interest rates in the retail credit market of Lithuania in a long run.
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PLATEN, ECKHARD. "AN ALTERNATIVE INTEREST RATE TERM STRUCTURE MODEL." International Journal of Theoretical and Applied Finance 08, no. 06 (September 2005): 717–35. http://dx.doi.org/10.1142/s0219024905003244.
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This paper proposes an alternative approach to the modeling of the interest rate term structure. It suggests that the total market price for risk is an important factor that has to be modeled carefully. The growth optimal portfolio, which is characterized by this factor, is used as reference unit or benchmark for obtaining a consistent price system. Benchmarked derivative prices are taken as conditional expectations of future benchmarked prices under the real world probability measure. The inverse of the squared total market price for risk is modeled as a square root process and shown to influence the medium and long term forward rates. With constant parameters and constant short rate the model already generates a hump shaped mean for the forward rate curve and other empirical features typically observed.
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Muciek, Bogdan Krzysztof. "Optimal stopping of a risk process: model with interest rates." Journal of Applied Probability 39, no. 02 (June 2002): 261–70. http://dx.doi.org/10.1017/s002190020002249x.
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The following problem in risk theory is considered. An insurance company, endowed with an initial capital a ≥ 0, receives premiums and pays out claims that occur according to a renewal process {N(t), t ≥ 0}. The times between consecutive claims are i.i.d. The sequence of successive claims is a sequence of i.i.d. random variables. The capital of the company is invested at interest rate α ∊ [0,1], claims increase at rate β ∊ [0,1]. The aim is to find the stopping time that maximizes the capital of the company. A dynamic programming method is used to find the optimal stopping time and to specify the expected capital at that time.
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Muciek, Bogdan Krzysztof. "Optimal stopping of a risk process: model with interest rates." Journal of Applied Probability 39, no. 2 (June 2002): 261–70. http://dx.doi.org/10.1239/jap/1025131424.
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The following problem in risk theory is considered. An insurance company, endowed with an initial capital a ≥ 0, receives premiums and pays out claims that occur according to a renewal process {N(t), t ≥ 0}. The times between consecutive claims are i.i.d. The sequence of successive claims is a sequence of i.i.d. random variables. The capital of the company is invested at interest rate α ∊ [0,1], claims increase at rate β ∊ [0,1]. The aim is to find the stopping time that maximizes the capital of the company. A dynamic programming method is used to find the optimal stopping time and to specify the expected capital at that time.
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Tefera Tessema, Ameha, and Jan Walters Kruger. "Testing performance of an interest rate commission agent banking system (AIRCABS)." Banks and Bank Systems 12, no. 3 (September 7, 2017): 113–41. http://dx.doi.org/10.21511/bbs.12(3).2017.09.
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This paper sought to analyze data and interpret statistical results in testing the performance of an interest rate commission agent banking system. Primary and secondary data were collected from banking industry in Ethiopia to test the research hypotheses, credit risk and liquidity crunch have no impact on AIRCABS, investor loan funding has a positive impact on profitability and sustainability of AIRCABS and discrete market deposit interest rate incentive has a positive impact on stable deposit mobilization in a bank. To test the hypothesis, statistical tools such as Cronbach’s alpha, Kuder-Richardson (KR-20), canonical correlation and multinomial logistic regression were used. The result showed that credit risk and liquidity crunch have no effect on an interest rate commission agent banking system, investor loan funding has a significant strong relationship with profitability and sustainability of AIRCABS and discrete market deposit interest rate incentive has also a significant strong relationship with stable deposit mobilization. This led to a conclusion that an interest rate commission agent banking system (AIRCABS) model is viable and reliable.
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Markova, Olga Mikhailovna. "Assessing influence of factors on interest risk of commercial bank." Vestnik of Astrakhan State Technical University. Series: Economics 2021, no. 1 (March 31, 2021): 115–24. http://dx.doi.org/10.24143/2073-5537-2021-1-115-124.
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In modern conditions of the rapid industrial development the banks have to forecast their risks and profitability precisely, to apply information technologies to assess their activities. To evaluate the bank's income, it is necessary to carry out an internal analysis of its assets and liabilities and determine the factors effecting the bank's profitability by managing interest rate risk. The hypothesis of the study is the analysis of the impact on the net interest income and interest rate risk of a commercial bank of factors such as the exchange rate and the key rate of the Bank of Russia (for example, Sberbank, PJSC). There has been studied the impact of the factors (exchange rate and key interest rate of Central Bank of Russia) on the bank's net interest income by using correlation and regression analysis and building a regression model. Many tools are found to be used by the experienced analysts. One of the main tools is GAP analysis of interest rate risk. There have been illustrated the graphs of changes in interest rates of savings and loan associations during the crisis in the United States in the 1950-1960, of realization of interest rate risk with an increase in interest rates, the distribution of assets and liabilities according to the maturity of the balance sheet structure, the impact of changes in the interest rate GAP on net interest income, etc. A matrix of correlations of all variables in the sample (rates of growing values) was constructed. Conclusions are drawn on the need to use hedging instruments (interest rate swaps, interest rate options), as well as of attracting the most reliable data on the state of interest rate risk in the commercial banks.
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Foster, Edward. "Net Interest Rates: History and Measurement." Journal of Forensic Economics 26, no. 1 (December 1, 2015): 99–114. http://dx.doi.org/10.5085/foen-26-01-08.1.
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Abstract Johnson and Gelles (1996) observed that starting in about 1980 the interest rates on U.S. Treasury securities rose sharply, and argued that because of the increase, forensic economists should not use low interest rates based on earlier experience for calculation of present values. Interest rates did indeed rise sharply. But by 1996 interest rates were already falling; rates have continued to fall so that the status quo ante has been essentially restored. This bit of forensic economic history would be of little interest except that Johnson and Gelles are still cited to help justify net interest rates more appropriate to the 1980s than to 2015. This note updates their work, using their same sources and method; it is intended in part to show that the high interest rates described in their paper are not now relevant. The note continues, to discuss how to measure net interest rates. There are two issues: (1) The net rate for an n-year note should use the n-year rate of wage increase; alternatively it should compare the 1-year rate of return on the n-year note (with capital gains from resale) with the 1-year rate of wage increase. (2) Interest rates are measured daily, and wages monthly. Does the use of annual averages change the results? Answer: the overall picture given by alternative definitions is not very sensitive to the definition of the net interest rate, except that when 3- or 10-year notes are held for just one year and re-sold to give a total annual return that includes interest and capital gains or losses, volatility of returns is considerably higher than when the securities are held to maturity; the result suggests that the return on Treasury notes for one year with resale is not appropriate for discounting earnings losses to present value.
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Janda, K., and P. Zetek. "Macroeconomic factors influencing interest rates of microfinance institutions in the Latin America and the Caribbean." Agricultural Economics (Zemědělská ekonomika) 60, No. 4 (April 28, 2014): 159–73. http://dx.doi.org/10.17221/62/2013-agricecon.
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Agricultural output in developing countries still represents a substantial part of the GDP. This ratio has actually increased in some areas such as the Latin America. As such, there is an increasing importance of microfinance institutions (MFIs) focusing on the activities associated with agriculture and encouraging entrepreneurship in agriculture and in the rural communities in general. The contribution of microfinance institutions consists mainly in providing special-purpose loans, usually without collateral. However, questions exist as to the magnitude and the adequate level of risk of providing micro-credit loans in relation to the interest rates being charged. We review two main approaches to setting interest rates in the MFIs. One approach takes the view that interest rates should be set at a high level due to the excessive risk that these institutions undertake. The second approach is to convince the public of the possibility of reducing these rates through cost savings, increased efficiency, and sharing best practice, etc. Subsequently we econometrically analyse the impact of macroeconomic factors on the microfinance interest rates in Latin America and the Caribbean. We show that these results depend on the chosen indicator of interest rate.
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Liu, Feng, and Ping Zou. "Research on the Interest Rate Risk Management of Commercial Bank Based on F-W Duration Convexity Model." Applied Mechanics and Materials 644-650 (September 2014): 5825–27. http://dx.doi.org/10.4028/www.scientific.net/amm.644-650.5825.
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With the pace of interest rate marketization reform accelerates, interest rate risk faced by commercial banks increasingly prominent, so a higher demand for its interest rate risk management capabilities is required. This article describes the type of interest rate risk, then use F-W Duration Convexity model to make an empirical analysis in five large commercial banks. The results show: the five large bank duration and convexity gap are all positive, when interest rates rise, the five bank NV will be reduced, interest rates decline, then increased. According to ΔNV/PA, ICBC CCB and ABC faced the biggest interest rate risk, BOC followed, BCM minimum.
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Brooks, Robert, and Benton E. Gup. "Embedded Options Impact On Interest Rate Risk And Capital Adequacy." Journal of Applied Business Research (JABR) 15, no. 4 (August 30, 2011): 11. http://dx.doi.org/10.19030/jabr.v15i4.5657.
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<span>In this article we consider cases in which a bank finances some option-embedded assets with option embedded liabilities and with equity. We show that risk-based capital guidelines that do not account for these interest sensitive options can be very misleading with regard to the actual interest rate exposure. In extreme cases, any change in interest rates can result in a deterioration in the value of such unhedged positions even though there may be no risk-exposure as measured by traditional means.</span>
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Hadi, Sofyanto. "The Effect of Interest Rate and Inflation on Forex Rates." Business and Entrepreneurial Review 5, no. 1 (January 3, 2006): 57. http://dx.doi.org/10.25105/ber.v5i1.1190.
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The purpose of this study is to do the simulation by using arbitrage facilities for such investment of foreign exchange. This study will find the best foreign exchange between US Dollar, SGD,<br />CAD and Yen, with the best interest rate and the best inflation rate for such transaction by using arbitrage transaction mechanism. In forex transaction, the risk of speculation is very high but this is becoming a reason why this kind of transaction was being attractive and obviously more economic players have an opportunity to get more profit due to differences occurred (spread) on exchange rates. The problem is how to manage such situation the most possible way, especially for managers. The role of estimation, for example by knowing the variables that determined foreign exchange rates, is getting more important in forex trading. Beside that, arbitrage can give additional profit from a forex investment and windfall profit from the spread of the foreign exchange.
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Bhutta, Neil, and Benjamin J. Keys. "Interest Rates and Equity Extraction During the Housing Boom." American Economic Review 106, no. 7 (July 1, 2016): 1742–74. http://dx.doi.org/10.1257/aer.20140040.
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Credit record panel data from 1999–2010 indicates that the likelihood of home equity extraction (borrowing, on average, about $40,000 against one's home) peaked in 2003 when mortgage rates reached historic lows. We estimate a 27 percent rise in extraction in response to a 100 basis point rate decline, and that house price growth amplifies this relationship. Differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions. Finally, equity extractions are associated with higher default risk, consistent with the use of borrowed funds for consumption or illiquid investment. (JEL D14, E43, E52, G12, R31)
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Bondt, Gabe J. de. "Interest Rate Pass-Through: Empirical Results for the Euro Area." German Economic Review 6, no. 1 (February 1, 2005): 37–78. http://dx.doi.org/10.1111/j.1465-6485.2005.00121.x.
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Abstract This paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.
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Özdemir, Durmus, and Harald Schmidbauer. "RISIKO TINGKAT SUKU BUNGA DI PASAR KEUANGAN TURKI PADA PERIODE WAKTU YANG BERBEDA." Buletin Ekonomi Moneter dan Perbankan 16, no. 3 (September 17, 2014): 195–218. http://dx.doi.org/10.21098/bemp.v16i3.21.
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A Measuring the risk associated with interest rates is important since it is beneficial in taking measures before negative effects can take place in an economy. We obtain a risk measure for interest rates by fitting the generalized Pareto distribution (GPD) to positive extreme day-to-day changes of the interest rate, using data from the Istanbul Stock Exchange (ISE) Second Hand Bond Market, namely Government Bond interest rate closing quotations, for the time period 2001 through 2009. Although the use of the GPD in the context of absolute interest rates is well ocumented in literature, our approach is different insofar and contributes to the literature as changes in interest rates constitute the target of our analysis, reflecting the idea that risk arises from abrupt changes in interest rate rather than in interest rate levels themselves. Our study clearly shows that the GPD, when applied to interest rate changes, provides a good tool for interest rate risk assessment, and permit a period-specific risk evaluation. Keyword: Interest rate risk; covered interest parity; Turkey; generalized Pareto distribution JEL Classification: G1; C1
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Sbârcea, Ioana Raluca. "Risk of Interest Rates at the Level of Commercial Banks in Romania." Land Forces Academy Review 22, no. 4 (December 1, 2017): 281–88. http://dx.doi.org/10.1515/raft-2017-0038.
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Abstract The banking system in Romania is a banking system under development, subject to fluctuations that exist on the market more than on more developed banking systems, fluctuations that can generate losses for banks if they are not properly managed. The losses that may be generated by these fluctuations, known as market risk, refer to the significant fluctuations in three indicators, namely the interest rate, the exchange rate and the asset price. In this article, I will analyse the interest rate risk from a conceptual point of view and the indicators that mitigate this risk. The analysis also contains a study of this risk among commercial banks in the system to highlight the level of risk and possible effects of its manifestation. I calculated and analysed the interest rate risk indicators, individually for the first three banks in the system, but also to comparatively, in order to highlight the existing differences.
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Mielus, Piotr, Tomasz Mironczuk, and Anna Zamojska. "Basis Risk and Net Interest Income of Banks." Folia Oeconomica Stetinensia 16, no. 2 (December 1, 2016): 40–59. http://dx.doi.org/10.1515/foli-2016-0024.
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Abstract The results of the banking sector are shaped primarily by commissions and net interest income. Net interest income is determined by the difference between the profitability of bank assets and liabilities. In the case when a different method is used to determine interest for each side of the balance sheet, there occurs a basis risk that may lead to the deterioration in the net interest income of the sector. This is the situation in the Polish banking sector, which is characterized by the presence of variable interest rates for long-term assets and fixed interest rates for short-term liabilities. The study aims to verify the following thesis: in an environment of falling interest rates we can observe the deterioration in net interest income of the banking sector, as a result of the materialization of the basis risk. The authors of the article state that the source of the basis risk is the mismatch between the reference rate used to define the interest flow of loans and the actual cost of financing the balance through term deposits collected from non-financial entities.
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Fushiya, Hirotaka, Tomoki Kitamura, and Munenori Nakasato. "Structured product investment behavior in low-interest rate environments." Journal of Risk Finance 22, no. 2 (May 25, 2021): 113–29. http://dx.doi.org/10.1108/jrf-12-2019-0232.
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Purpose This study aims to investigate the impact of interest rates, the underlying asset and investment experience on the investment behavior of Japanese retail investors toward structured products (SPs). Design/methodology/approach Three treatments are constructed through internet-based survey experiments: interest rate, underlying asset framing and investment experience treatments. The interest rate treatment includes high- and low-interest rate environments. The underlying asset framing treatment includes equity and foreign exchange rates for the SP. The investment experience treatment includes experienced and inexperienced respondents for SPs. Findings The main finding of this study concerns the effect of the interaction between low-interest rates and investment experience. Specifically, SP-experienced investors tend to choose SPs in a low-interest rate environment and prefer equity-linked SPs, even though such SPs are overpriced. This finding is useful for financial regulators in formulating policies that protect retail SP investors in low-interest rate environments worldwide. Originality/value This study is the first to measure the sensitivities of investment behavior regarding the relative attractiveness of SPs to low-risk straight bonds, given interest rates, the underlying asset and investment experience. It provides evidence to support the development of SP regulations.
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Zhang, Xin, and Xiaoxiao Zheng. "Optimal Investment-Reinsurance Policy with Stochastic Interest and Inflation Rates." Mathematical Problems in Engineering 2019 (December 17, 2019): 1–14. http://dx.doi.org/10.1155/2019/5176172.
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The aim of this paper is to study a classic problem in actuarial mathematics, namely, an optimal reinsurance-investment problem, in the presence of stochastic interest and inflation rates. This is of relevance since insurers make investment and risk management decisions over a relatively long horizon where uncertainty about interest rate and inflation rate may have significant impacts on these decisions. We consider the situation where three investment opportunities, namely, a savings account, a share, and a bond, are available to an insurer in a security market. In the meantime, the insurer transfers part of its insurance risk through acquiring a proportional reinsurance. The investment and reinsurance decisions are made so as to maximize an expected power utility on terminal wealth. An explicit solution to the problem is derived for each of the two well-known stochastic interest rate models, namely, the Ho–Lee model and the Vasicek model, using standard techniques in stochastic optimal control theory. Numerical examples are presented to illustrate the impacts of the two different stochastic interest rate modeling assumptions on optimal decision making of the insurer.
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Ballestra, Luca Vincenzo, Graziella Pacelli, and Davide Radi. "Valuing strategic investments under stochastic interest rates: A real option approach." Corporate Ownership and Control 16, no. 3 (2019): 89–97. http://dx.doi.org/10.22495/cocv16i3art8.
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One of the most challenging issues in management is the valuation of strategic investments. In particular, when undertaking projects such as an expansion or the launch of a new brand, or an investment in R&D and intellectual capital, which are characterized by a long-term horizon, a firm has also to face the risk due to the interest rate. In this work, we propose to value investments subject to interest rate risk using a real options approach (Schulmerich, 2010). This task requires the typical technicalities of option pricing, which often rely on complex and time-consuming techniques to value investment projects. For instance, Schulmerich (2010) is, to the best of our knowledge, the first work where the interest rate risk is considered for real option analysis. Nevertheless, the valuation of investment projects is done by employing binomial trees, which are computationally very expensive. In the current paper, a different modeling framework (in continuous-time) for real option pricing is proposed which allows one to account for interest rate risk and, at the same time, to reduce computational complexity. In particular, the net present value of the cash inflows is specified by a geometric Brownian motion and the interest rate is modeled by using a process of Vasicek type, which is calibrated to real market data. Such an approach yields an explicit formula for valuing various kinds of investment strategies, such as the option to defer and the option to expand. Therefore, the one proposed is the first model in the field of real options that accounts for the interest rate risk and, at the same time, offers an easy to implement formula which makes the model itself very suitable for practitioners. An empirical analysis is presented which illustrates the proposed approach from the practical point-of-view and highlights the impact of stochastic interest rates in investment valuation.
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Pyka, Irena, and Aleksandra Nocoń. "Negative Interest Rate Risk. Atavism or Normalization of Central Banks’ Monetary Policy." Acta Universitatis Lodziensis. Folia Oeconomica 3, no. 342 (August 22, 2019): 89–116. http://dx.doi.org/10.18778/0208-6018.342.05.
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In the face of the global financial crisis, central banks have used unconventional monetary policy instruments. Firstly, they implemented the interest rate policy, lowering base interest rates to a very low (almost zero) level. However, in the following years they did not undertake normalizing activities. The macroeconomic environment required further initiatives. For the first time in history, central banks have adopted Negative Interest Rate Policy (NIRP). The main aim of the study is to explore the risk accompanying the negative interest rate policy, aiming at identifying channels and consequences of its impact on the economy. The study verifies the research hypothesis stating that the risk of negative interest rates, so far unrecognized in Theory of Interest Rate, is a consequence of low effectiveness of monetary policy normalization and may adopt systemic nature, by influencing – through different channels – the financial stability and growth dynamics of the modern world economy.
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Suharyanto, Suharyanto, and Achmad Zaki. "THE EFFECT OF INFLATION, INTEREST RATE, AND EXCHANGE RATE ON STOCK RETURNS IN FOOD & BEVERAGES COMPANIES." Jurnal Aplikasi Manajemen 19, no. 3 (September 1, 2021): 616–22. http://dx.doi.org/10.21776/ub.jam.2021.019.03.14.
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The purpose of this study was to determine the effect of technical information on stock returns partially. Risk and return are interrelated. The greater the return, the greater the risk obtained. However, if these risks are managed, the risks that will occur can be controlled properly. Several things need to be considered in making investment decisions, namely, by analyzing fundamental information and technical information, including inflation, exchange rates, interest rates, and their effect on stock returns. The method used in this study uses quantitative methods. This study indicates that inflation has a significant negative effect on stock returns, interest rates have no effect on stock returns, and the exchange rate has a significant negative effect on stock returns. Further researchers are expected to pay attention to the influence of other factors that can affect price movements and company stock returns.
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Christensen, Jens H. E., and Glenn D. Rudebusch. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt." Review of Economics and Statistics 101, no. 5 (December 2019): 933–49. http://dx.doi.org/10.1162/rest_a_00821.
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The downtrend in U.S. interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest. We examine this issue using dynamic term structure models that account for time-varying term and liquidity risk premiums and are estimated directly from prices of individual inflation-indexed bonds. Our finance-based approach avoids two potential pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and misspecification of output and inflation dynamics. We estimate that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.
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Antonacci, Flavia, Cristina Costantini, and Marco Papi. "Short-Term Interest Rate Estimation by Filtering in a Model Linking Inflation, the Central Bank and Short-Term Interest Rates." Mathematics 9, no. 10 (May 20, 2021): 1152. http://dx.doi.org/10.3390/math9101152.
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We consider the model of Antonacci, Costantini, D’Ippoliti, Papi (arXiv:2010.05462 [q-fin.MF], 2020), which describes the joint evolution of inflation, the central bank interest rate, and the short-term interest rate. In the case when the diffusion coefficient does not depend on the central bank interest rate, we derive a semi-closed valuation formula for contingent derivatives, in particular for Zero Coupon Bonds (ZCBs). By using ZCB yields as observations, we implement the Kalman filter and obtain a dynamical estimate of the short-term interest rate. In turn, by this estimate, at each time step, we calibrate the model parameters under the risk-neutral measure and the coefficient of the risk premium. We compare the market values of German interest rate yields for several maturities with the corresponding values predicted by our model, from 2007 to 2015. The numerical results validate both our model and our numerical procedure.
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Qudratullah, Mohammad Farhan. "Zakah Rate In Islamic Stock Performance Models: Evidence From Indonesia." IQTISHADIA 13, no. 1 (June 15, 2020): 107. http://dx.doi.org/10.21043/iqtishadia.v13i1.6004.
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<p>There are three models commonly used to measure the performance of Islamicstocks, named Treynor Ratio, Sharpe Ratio, and Jansen Index. One component of the three models is risk-free returns which are usually approached with interest rates, whereas interest rates are prohibited in the concept of Islamic finance. This paper will approach a risk-free return with zakat-rate on the Islamic capital market in Indonesia from January 2011 - July 2018, then compare it with a model that uses interest rates. The results obtained by the model with interest rates and zakah-rate in this third model have very high suitability values, so that zakah-rate can be used as an alternative substitute for interest rates in measuring the Islamic stock performance. Beside not contradicting the concept of Islamic economics, calculation of models with zakah-rate is simpler than models with interest rates.</p>
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Vayanos, Dimitri, and Jean-Luc Vila. "A Preferred‐Habitat Model of the Term Structure of Interest Rates." Econometrica 89, no. 1 (2021): 77–112. http://dx.doi.org/10.3982/ecta17440.
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We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk‐averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs' carry trades. Arbitrageurs earn rents from transmitting the shocks through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates underreact to forward‐guidance announcements about short rates. Large‐scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.
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Wijaya, Chandra, Yunika Lucianna, and Fibria Indriati. "Determinants of interest rate spreads of conventional banks listed on the Indonesia Stock Exchange." Banks and Bank Systems 15, no. 4 (December 9, 2020): 69–79. http://dx.doi.org/10.21511/bbs.15(4).2020.06.
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The purpose of this study is to examine the variables that determine the interest rate spreads (IRS) of conventional banks listed on the Indonesia Stock Exchange (IDX). There are four major variables that affect a bank’s interest rate spreads, namely financial bank, macroeconomics, economic freedom and market structure variables. The study participants are conventional banks listed on the Indonesia Stock Exchange from 2013 to 2017. Data was tested by using the OLS regression model. The results of this study show that all of the financial bank variables (Liquidity Risk (LR), Return to Asset Ratio (RTAR), Capital Adequacy (CA), Cost Efficiency Ratio (CER), and Risk Aversion (RA)) can significantly affect interest rate spreads. While of the macroeconomic variables, only two can significantly affect interest rate spreads, namely Gross Domestic Product (GDP) and Inflation Rate (IR). Furthermore, all of the variables of economic freedom and market structure can significantly determine interest rate spreads. AcknowledgmentThe authors thank the Research Cluster of Governance and Competitiveness, Faculty of Administrative Sciences, Universitas Indonesia, for providing financial assistance and supporting materials related to discussion, and assistance in writing this paper.
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Akhmedov, Fakhraddin, Mhd Zeitoun, and Humssi Al. "Financial engineering to optimize risk management in banks based on Interest Rate Swaps to better hedge the exposure to interest rate fluctuations the case of banks in Syria." International Review, no. 1-2 (2021): 99–107. http://dx.doi.org/10.5937/intrev2102101a.
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The banking system is affected by uncertainties related to the evolution of pandemic. One of the identified risks is that of a fluctuation of rates. Volatility of Interest rates is one of the major risks for the banking system. Therefore, financial engineering can be used as a very important hedging practice for banks against such a risk. The aim of this study is to develop a risk hedging mechanism to better overcome market volatility by hedging position against the exposure to interest rate risk based on credit derivatives. Therefore, this study uses Interest Rate Swaps (IRS)s to better hedge the exposure of banks to interest rate fluctuations in stress conditions giving consideration to the case study of banks in Syria in optimizing hedging practices based on Interest Rate Swaps. The aim is to use financial engineering to provide banks with a hedging technique to better absorb shocks in times of stress conditions. This has been discussed and illustrated with visual model diagrams. The case study of banks in Syria is not just the story of individual banks but a window into how to hedge the exposure of banks in stress conditions. In the end, most banking crises are quite similar. The recommendations set out in this study provide banks with an optimized hedging practice which is not part of current financial engineering at banks in Syria.
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Azar, Samih Antoine. "The Pure Expectations Theory and Quarterly Interest Rate Premiums." Accounting and Finance Research 7, no. 1 (December 4, 2017): 161. http://dx.doi.org/10.5430/afr.v7n1p161.
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The expectations theory posits that the long interest rate is an average of expected short term interest rates with the possibility of the existence of a risk premium. This paper looks upon fourteen samples of investments for which the difference in maturity is three months. All yields are actual yields and are adjusted to have the same maturities as the short rate. The evidence is strong for the pure expectations theory which predicts that the risk premiums are zero. This should not be surprising because the premium that we are looking for is merely 4 basis points per quarter. The contribution of this paper, besides giving support to the pure expectations theory, is to lay out the fundamental and basic methodology that one should follow in order to study other investments similar to ours. Both unconditional and conditional tests are performed. Because of sampling error and small-sample bias the unconditional tests may be preferable.
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Burenin, A. N. "NEGATIVE INTEREST RATES: CENTRAL BANKS INITIATED AN EXPERIMENT." MGIMO Review of International Relations, no. 4(49) (August 28, 2016): 262–73. http://dx.doi.org/10.24833/2071-8160-2016-4-49-262-273.
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Negative interest rates appeared as a consequence of economic problems that countries with market economy came across after the crises of2007-2008. The attempts of monetary authorities to stimulate economies with the help of quantitative easing didn't bring the desired result. That's why the central banks once again resorted to a traditional tool of their monetary policy of changing interest rates. But this time they launched an experiment, they used negative interest rates. The European Central Bank, the Swedish Riksbank, the Bank of Japan, and the National Bank of Hungary introduced negative rates in order to stimulate economic growth and fight the threat of deflation, the Danish National Bank and the Swiss National Bank tried to deter appreciation of their currencies. Negative rates of the central banks brought about negative yields of government and nongovernment securities in several countries. The problem acquires an aggravated form due to the fact that negative rates appeared in several European countries simultaneously at the moment when global financial markets were not in crises. Some questions arise concerning the negative rates, for example, how low can central banks bring down the rates in the future, what is their influence on the stock markets, what is the reaction of depositors to the introduction of negative deposit rates by commercial banks, must one consider a negative rate as a rate of interest or payment to store money of the depositor, in which circumstances negative rates can be justified to fight deflation. The last question plays an important role, because recent studies find that positive economic growth is possible during deflation. If central banks don't take this nuance into consideration, they can create economic imbalances by increasing liquidity. Negative rates are not as inoffensive as it may seem at first glance. Not far ago an investor, who tried to averse risk, was buying government securities. Their yields according to theory could not become lower than zero. By introducing negative rates, the central banks told in fact that the lower bound of the interest rate didn't exist any more. Thus, now investors find themselves in a situation of complete uncertainty, and risk becomes an absolute dominance. They can't averse it even in government securities. Such situation influences financial markets in a negative way. If we go up to a higher level of abstraction and imagine an economy as a live organism, which tries to rehabilitate itself, then the negative rates can be considered as a way through which the economy tries to solve the task of reducing liquidity. Studies show that so far the introduction of modestly negative rates have not affected the functioning of money markets much. In anticipation of the forthcoming cyclical crisis it is possible to give advice to the central banks to make one more step in the issue of the development of new tools of monetary regulation. Such new tools could be represented by futures contracts on interest rates securities.
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Conrad, Christian A. "The Effects on Investment Behavior of Zero Interest Rate Policy—Evidence From a Roulette Experiment." Applied Economics and Finance 6, no. 4 (May 16, 2019): 18. http://dx.doi.org/10.11114/aef.v6i4.4272.
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This paper examines the effects of interest rate cuts on investment behavior. The methodology is to simulate investment decision making under different capital costs. The experiment showed that decreasing interest rates encourage risk-taking. With the decreased interest rate as borrowing costs the risk taking increased weakly but continuously. The risk taking increased strongly when the interest rate reached zero. Thus the experiment showed excessive risk-taking when there were no capital costs. This finding supports the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles and overinvestments or wrong investments in the real economy.
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Kim, Don H., and Athanasios Orphanides. "Term Structure Estimation with Survey Data on Interest Rate Forecasts." Journal of Financial and Quantitative Analysis 47, no. 1 (December 16, 2011): 241–72. http://dx.doi.org/10.1017/s0022109011000627.
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AbstractThe estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by severe small-sample problems arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. To illustrate the methodology, we estimate the 3-factor affine-Gaussian model with U.S. Treasury yields data and demonstrate that incorporating information from survey forecasts mitigates the small-sample problem. The model thus estimated for the 1990–2003 sample generates a stable and sensible estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.
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Bennouna, Ghita, and Mohamed Tkiouat. "Stochastic model of microcredit interest rate in Morocco." Risk Governance and Control: Financial Markets and Institutions 6, no. 4 (2016): 268–73. http://dx.doi.org/10.22495/rgcv6i4c2art3.
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Access to microcredit can have a beneficial effect on the well-being of low-income households excluded from the traditional banking system. It allows this population to receive affordable financial services to help them to meet their needs and to improve their living conditions. However to provide access to credit, microfinance institutions should ensure not only their social mission but also commercial and financial mission to enable the institution to perpetuate and become self-sufficient. To this end, MFIs (microfinance institutions) must apply an interest rate that covers their costs and risk, while generating profits, Also microentrepreneurs need, to this end, to ensure the profitability of their activities. This paper presents the microfinance sector in Morocco. It focuses then on the interest rate applied by the Moroccan microfinance institutions; it provides also a comparative study between Morocco and other comparable countries in terms of interest rates charged to borrowers. Finally, this article presents a stochastic model of the interest rate in microcredit built in random loan repayment periods and on a real example of the program of loans of microfinance institution in Morocco.