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The Difference Between Deterministic and Stochastic Asset Liability Management Models and Why Examiners are asking for Stochastic Modeling

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By Emily Hollis, CFA, Partner Stochastic modeling is imperative to accurately calculate a financial institution’s net economic value (NEV), but is not needed to calculate net interest income (NII). To explain, let’s start with actual definitions of NEV, stochastic and deterministic modeling, and their relation to market value changes and effective duration measurement. NEV is…

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