The GAP model of interest rate risk analysis and management

Abstract

GAP is known as the oldest and simplest model of measuring interest rate risks analysis in banking theory. When applying GAP analysis, bank balance is divided into several time intervals. GAP analysis can be viewed as a static and dynamic category. GAP position can be negative, positive or zero. GAP analysis indicators are basically seen in the GAP ratio, which is the ratio of interest sensitive assets and interest-bearing liabilities of the bank. ARBL model of measuring the interest rate is based on the maturity mismatch of certain financial assets and liabilities. This model is often referred to as a revaluation of GAP concept because the balance sheet positions of banks are categorized according to the remaining time before new interest rates are determined. The key objective of ARBL analysis refers to as accurate as possible assessment of the effect of interest rate changes on bank profitability. Problems with applying ARBL model arise from the demand of assets and liabilities, i.e. instruments that do not have fixed maturity.

Keywords

• gap analysis
• arbl model