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Interest rate risk of Chinese commercial banks based on the GARCH-EVT model

Business

Interest rate risk of Chinese commercial banks based on the GARCH-EVT model

X. Chen, Z. Shan, et al.

This paper dives into the significance of Value-at-Risk (VaR) for Shanghai banks' overnight offered rates post-interest rate marketization in China. The researchers employed a unique two-stage method combining GARCH models and extreme value theory, revealing that the EGARCH-GED model significantly enhances risk management strategies for commercial banks. The study, conducted by Xin Chen, Zhangming Shan, Decai Tang, Biao Zhou, and Valentina Boamah, offers essential insights and policy implications for better banking practices.

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Abstract
Interest rate market risk faced by China's commercial banks is increasing after the announcement that the interest rate marketisation is completed. This paper examines the Value-at-Risk, and statistical properties in the daily price return of Shanghai banks' overnight offered rate. The study applies two-stage approaches, combining GARCH-type models with extreme value theory. Firstly, the Markov regime switching model is used to test the regime states of the series. Secondly, the performance of different VaR models are examined. Results show that the extreme value approach estimates better at the 99% confidence level. The EGARCH-GED model is the most suitable of the employed GARCH-type models. The back-testing results support the idea that the approach used in this study is appropriate for improving commercial banks' daily risk management. This paper applies the GARCH-EVT method for interest rate measurement after China's interest rate marketisation and added regime analysis of interest rate. Suggested policy implications will help formulate policies that guide the activities of commercial banks in China.
Publisher
Humanities and Social Sciences Communications
Published On
Nov 14, 2023
Authors
Xin Chen, Zhangming Shan, Decai Tang, Biao Zhou, Valentina Boamah
Tags
Value-at-Risk
SHIBOR
GARCH models
extreme value theory
risk management
China
commercial banks
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