An Empirical Analysis of the Jarrow-van Deventer Model for Valuing Non-Maturity Demand Deposits

Abstract

The theory of arbitrage-free valuation for interest rate-dependent instruments is now well-developed. One of the most powerful (and popular) approaches is provided by the Heath-Jarrow-Morton (HJM) framework. In this article, the same principles are applied to what is one of the most important classes of fixed-income instruments as far as ordinary investors are concerned: bank deposits. Janosi, Jarrow, and Zullo first develop a basic theoretical model to bring deposits into the HJM framework. They then take the model to the data and show that it is quite successful in explaining the behavior of deposits for a single large bank and for the banking system as a whole. The model is also useful in estimating durations and average lives for different classes of deposits without fixed maturities.