Measurement and Management of Interest Rate Risk of Commercial Banks: Based on VaR-GARCH Model of a Case Study of SHIBOR

Abstract

With the acceleration of financial liberalization in China and the tremendous changes in the international financial situation, China’s commercial banks face considerable interest rate risks. The profitability and solvency of commercial banks have been impacted, leading to increased operational uncertainty and even systemic risks. The Shanghai Interbank Offered Rate, launched in 2007, tends to approach the benchmark interest rate in the financial market. Therefore, this paper selects The Shanghai Interbank Offered Rate (SHIBOR) overnight lending rate from January 2017 to July 2021 as a sample and adopts a method combining the VaR and GARCH models. Through empirical analysis, this paper establishes a GARCH model to eliminate the heteroscedasticity phenomenon in the data. The results show that the SHIBOR series has the characteristics of stationary, non-normal distribution, serial autocorrelation, and heteroscedasticity. The GARCH (2,2) model under the generalized error distribution (GED) is the most effective for measuring interest rate risk. Based on this, this article puts forward suggestions that commercial banks should enhance their awareness of interest rate risk management and should actively use financial derivatives to hedge interest rate risks.