Modeling non-maturity deposits

The importance of non-maturity deposits (NMD) in banking is substantially high as the large part of commercial banks' balance sheets consist of client products with non-contractual cash-flow features. Non-maturity deposits are special financial instruments as the bank has an option to change the paid interest on the deposit account at any time, and the client has the option to withdraw any amount from the account without a period of notice. The liquidity and interest rate risk management of these products are a crucial part of ALM analysis; therefore, modeling of non-maturity deposits needs special attention. The uncertain maturity and interest rate profile generates a high level of complexity in their hedging, internal transfer pricing, and risk modeling.

A Model of deposit interest rate development

In the following code, we use Austrian non-maturity deposit time series data that we queried from the ECB Statistical Database, which is publicly available. We have...