Measuring Interest Rate Risk Management by Financial Institutions

RePEc Short ID: pbr67
ORCID iD: 0000-0001-8184-2610

Brunetti, Celso; Foley-Fisher, Nathan; Verani, Stéphane

doi:10.17016/FEDS.2023.067

Working Paper

Measuring Interest Rate Risk Management by Financial Institutions

Abstract: Financial intermediaries manage myriad interest rate risk exposures. We propose a new method to measure financial intermediaries' residual interest rate risk using high-frequency financial market data. Our method exploits all available high-frequency information and is valid under extremely weak assumptions. Applying the method to U.S. life insurers, we find their interest rate risk management strategies are generally effective. However, life insurers are more sensitive to changes in long-term interest rates than property and casualty insurers. We show that the term premium helps to explain the difference in sensitivities between the two types of insurer.

Keywords: Financial institutions; Interest rate risk management; High-frequency financial econometrics; Subsampling; Life insurers;

JEL Classification: G20; C58;

https://doi.org/10.17016/FEDS.2023.067