THE EFFECTS OF INTEREST RATE LEVELS AND VOLATILITY ON THE MATURITY INTERMEDIATION DECISION

Abstract

In this paper, we examine the effect of changing interest rate levels and volatility on the maturity intermediation decisions o f a commercial bank. We point out the incentive for the bank to hold high risk long-term asset and liability maturity positions. Further, the greater the interest rate volatility, the greater is the incentive to accept the high risk position. We employ a framework o fpartial adjustment o f revenues and costs to unexpected changes in interest rates to estimate the maturity intermediation and allow the parameters to vary over time. The estimates of maturity composition are then related to the levels and volatility of interest rates.

Keywords

• interest rate levels
• volatility
• maturity intermedeation decision
• commercial bank