Interest Rate Risk Measurement Of Chinese Commercial Banks

Interest rates are at the core of the modern economy and finance. In recent years,with the substantial progress in China interest rate market, the level of interest ratesshowed frequent fluctuations and uncertainty. Since commercial banks in china havetheir own characteristics, nearly eighty percent of revenues come from interest income,so interest rate risk faced by China commercial banks increase suddenly. However thestudy of China commercial banks’ interest rate risk is late. Compared with level oftheory and practice of foreign banks, China is lagging behind. The interest rate risk ofChina commercial banks has become the focus in the academic and practice circles.VaR (Value-at-Risk) has become a mainstream tool for measuring interest raterisk of foreign commercial banks, and widely used in banking, securities, insurance,financial derivatives. It will be combining with the actual situation of Chinacommercial banks to establish a method of measuring interest rate risk, which hasimportant theoretical and practical significance for how to grasp the opportunities bythe interest rate market, to avoid the risk of interest rate liberalization, likely to formthe better use of interest rates and pricing, and optimize the business structure, reducebusiness risk and support the healthy and stable development of China economy.The paper reviews the basic theory of interest rate risk, and introduction theinterest rate risk measurement methods and Copula function models. Throughestablish the GARCH (1,1)-t and GARCH (1,1)-GED models to determine themarginal distribution of interest rates. Combined the Copula function and VaR model,author establish GARCH-Copula-VaR model, and calculate the interest rate risk VaRthrough Monte Carlo simulations. Compare the traditional VaR model, the resultsshow that the traditional VaR calculation underestimated the risk. The author thinksthat this is because the traditional method is based on the assumption of normaldistribution and linear correlation, and there are inevitable defects, thus it led tounderestimating the VaR. So based on the Copula-VaR method can measure moreeffectively calculate the commercial bank’s interest rate risk. Finally, author summary take some suggestions for China commercial banks interest rate risk management...