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Managing Risk in Thrift Institutions: Beyond the Duration Cap

  • Author(s): Roll, Richard
  • et al.
Abstract

ABSTRACT

Managing Risk in Thrift Institutions: Beyond the Duration Gap

Even if thrift institutions were exposed only to interest rate risk, gap management using simple duration would be an imperfect method, particularly for callable assets and liabilities. Duration measures interest rate risk for parallel shifts in the yield curve, but actual yield curve shifts should not be, and usually are not, parallel.

An alternative to duration is a multi-factor model such as the Arbitrage Pricing Model, (APT). An empirical investigation of a sample of large thrifts disclosed that they are exposed to APT factors such as inflation, investor confidence, and the term structure. The level of thrift exposure to these risk factors is twice that of the average industrial company and thrifts also exhibit an unusually large amount of non-systematic risk.

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