Forecast quality of interest rate risk measures in cases of increasing yield curves – A comparison between the Historical Simulation and the EBA IRRBB scenarios
| Authors | |
|---|---|
| Year of publication | 2019 |
| Type | Article in Proceedings |
| Citation | |
| Keywords | Interest Rate Risk, IRRBB, Scenarios, EBA |
| Description | Driven by the ECB interest rate policy, there is a historically low level of yields in Europe. For future development, three scenarios are in focus: a Japanization with an ongoing low level of yields, a further decline in the yield curve and a scenario of increasing yields. Against the background of an inverse relationship between market rates and bond prices, especially a future rising scenario of interest rate risk affects present value risk measurements. Strengthened by the EBA’s regulation on interest rate risk in the banking book (IRRBB) is most relevant for banks. IRRBB regulation provides six interest rate risk scenarios. In addition to internal models, like the most common Historical Simulation, there are six EBA scenarios which should be considered in risk management. Hence, we analyze the future forecast quality of the Historical Simulation and the ECB IRRBB interest rate risk scenarios in a mirrored scenario of increasing yields. |