Market uncertainty and interest rate risk of commercial banks based on duration, modified duration, convexity and F-W model: Evidence from COVID-19 epidemic

Abstract

COVID-19 affects the supply and demand of funds in the financial market, leads to great uncertainty in the capital market, and causes the concern of interest rate risk of commercial banks. Therefore, it is necessary to figure out how to eliminate loss and negative effects on the capital market. In this paper, we will study the interest rate risk of China’s commercial banks through theoretical analysis and empirical analysis. We will use the F-W duration model and the commercial bank’s 2019 and 2020 annual report data to make some empirical analysis. Our analysis reflects the degree of interest rate risk affected by COVID-19 in China's commercial banks. We find that ICBC had interest rate risk both before and after the epidemic, but interest rate risk was rather less after being affected by the epidemic. Finally, we also explored the detailed mechanism for the decrease of interest risk.