This project implements a leverage-adjusted Duration Gap framework to quantify the impact of interest rate movements on a bank’s Economic Value of Equity (EVE). The model is aligned with FRM and IRRBB methodology and demonstrates how duration mismatches between assets and liabilities translate into changes in net worth under interest rate shocks.
- Market-value weighted duration calculation for assets and liabilities
- Computation of leverage-adjusted duration gap
- Scenario-based estimation of change in Economic Value of Equity (ΔEVE)
- Interpretation of interest rate risk exposure (long vs short duration equity)
The model follows these steps:
- Construct asset and liability duration profiles using market values
- Compute average asset duration (DA) and liability duration (DL)
- Calculate the leverage-adjusted duration gap
- Apply a user-defined interest rate shock
- Estimate the resulting change in market value of equity (ΔEVE)
- Provide management-style interpretation of results
- Ensure Python 3.x is installed on your system.
- Install the required dependency: pandas
- Download the repository and navigate to the project folder.
- Run the script.
- When prompted, enter the interest rate change in percentage points (e.g., -3 for +3%).
- Review the asset and liability duration tables, duration gap summary, and ΔEVE impact printed in the console.
- A positive duration gap indicates equity behaves like a long-duration position, losing value when interest rates rise.
- A negative duration gap indicates equity behaves like a short-duration position, gaining value when interest rates rise.
- The magnitude of the duration gap determines the sensitivity of equity to interest rate movements.
- Python
- Pandas
This is a simplified educational model developed for learning and demonstration purposes. It does not represent a production-ready risk system.