Interest Rate Risk in the Banking Book (IRRBB) – Comparing Variance/Covariance with Historical Simulation and Several Copula Functions with Focus on the Actual EBA Guidelines
Interest Rate Risk in the Banking Book (IRRBB) – Comparing Variance/Covariance with Historical Simulation and Several Copula Functions with Focus on the Actual EBA Guidelines

Author(s): Martin Svoboda, Svend Reuse, Annika Rüder, Noel Boka
Subject(s): Business Economy / Management, Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: Value at Risk; Copula; EBA; IRRBB;
Summary/Abstract: Interest rate risk and its measurement are important for banks worldwide. Strategic maturity transformation positions in combination with the historical low level of yields leads to the question, whether the standard risk measurement models as variance/covariance or historical simulation lead do adequate results. This article answers this question and offers an empirical analysis in which several alternative Copula functions are used to quantify interest rate risk. The results are compared to the EBA guidelines on IRRBB. The aim is to show if the six interest rate risk scenarios that are defined by the EBA are an adequate measurement method.

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