| dc.description.abstract | This thesis aims to present an in-depth exploration of the Liquidity Coverage Ratio (LCR),
and further analyze the optimum allocation of High-Quality Liquid Assets (HQLA) for
Norwegian banks. Additionally, we compare our simulated portfolios to our reference
portfolios to explore if today's LCR management can improve. To answer the question at hand,
we analyze a unique dataset spanning from 2016 to 2023, based on credit margins and realized
excess returns for HQLA, which in turn, comprises relevant assets for Norwegian banks
liquidity portfolio.
The analysis is separated into two parts, where the first part focuses on data inspection. Here,
we utilize correlation-, standard deviation- and variance ratio calculations on credit margins
and realized excess return to elucidate the behavior of HQLA under varying financial
situations. The second part introduces our simulation analysis where we illustrate our findings
for several optimum HQLA portfolio compositions, taking varying constraints into
consideration.
Through our research, we find strong tendencies for mean reversion in our dataset. Our
calculations indicate that credit margins for HQLA revert to the mean for 52-week horizons.
This discovery provides valuable insights for liquidity portfolio managers, as this detail is
currently neglected in today's practice. Furthermore, we see that our optimum solutions deviate
from our reference portfolios. Consequently, by implementing similar optimization
techniques, banks have the potential to enhance their performance in terms of risk and return.
In conclusion, our findings suggest that Norwegian banks can improve the management of
their liquidity portfolio. However, it is important to recognize that liquidity portfolio
management does not constitute the primary function of banks overall activities. Moreover,
although there is clear potential for enhancement in LCR management, it is crucial to adopt a
comprehensive approach that considers the wider goals of the LCR requirements. Effective
liquidity portfolio management involves not only optimizing returns but also adhering to
regulatory requirements and maintaining stability across various market conditions. | en_US |
