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My client (bank) currently follows a naive method to model the maturity term of chequing accounts. We need to model the maturity to correctly calculate the FTP pricing of these chequing accounts.

The method is :we look historically what is the average life of the checking account before the customer withdrew all the cash and take that average as the maturity of an active chequing account. The averages are per custoemr demographic, and also account balance bins.

How can I improve on this basic model?

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I am afraid there is no short answer to that question. However there is some literature you can check. In this paper the author gives an overview over different methods and lists a lot of references.

One approach is to decompose the volume timeseriies of your checking accounts into two parts:

  • One volatile part: this is money which customers use to cover their everyday needs (rent, consumption etc.)
  • One core part: this is money which customers leave on their accounts.

Then you try to replicate the core part of this time series with a bond portfolio: the idea is that the cashflows of the bonds should match the liquidity outflow of your accounts (such models are often called replication models).

The maturity term of the deposits can then be approximated by the duration of the bond portfolio.

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  • $\begingroup$ Thank you. Will this replication approach perform better than the naive approach? $\endgroup$ – Victor123 Jul 30 at 15:14
  • $\begingroup$ For me it did, but in general it is hard to say I would say. $\endgroup$ – Cettt Jul 31 at 6:51

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