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Measuring and Managing Liquidity Risk by Francesco Fede, Antonio Castagna

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9

Behavioural models

9.1 INTRODUCTION

Some items on the balance sheets of banks need to be modelled by a behavioural approach. By “behavioural” is generally meant a model that takes into account not only standard rationality principles to evaluate contracts, which basically means that economic agents prefer more wealth to less wealth, and that they prefer to receive cash sooner than later; behavioural models consider other factors as well, typically estimated by means of statistical analysis, which may produce effects that otherwise could not be explained. It should be stressed that in any event financial variables, such as interest rates or credit spreads, are the main driver of customer or, more generally, counterparty behaviour.

There are three main phenomena that need behavioural modelling: prepayment of mortgages, evolution of the amount of sight and saving deposits and withdrawals from credit lines. We will propose models for each focusing mainly on what we think is a good solution for liquidity management, without trying to offer a complete picture on the entire range of available models developed in theory or in practice. Anyway, as far as mortgage prepayments and withdrawals from credit lines are concerned, we introduce models that to our knowledge have never been proposed before, which aim at considering financial, credit and liquidity risk in a unified framework.

9.2 PREPAYMENT MODELLING

The prepayment of mortgages has to be properly taken into account in liquidity ...

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