Usingterm structure models for interest rates

Another approach, which is especially relevant for commercial business, is to look
for correlations of the balance to interest rates. If a significant correlation between
the deposit balances and the short rate (O/N or 3M-deposit rate) exists, it is possible
to build a simple regression model based on this rate. It is also feasible to build more
sophisticated regression models using past balances, a time trend and changes in
interest rates.
The crucial point is now the following. As soon as we have defined such a model,
based on the short rate, one of the now classic term structure models for interest
rates as proposed by Cox, Ingersoll and Ross or Heath, Jarrow and Morton can be
used to forecast the future demand deposit behavior. One can then calculate the
sensitivity of the demand deposits to bumps in the yield curve. These sensitivities
can then be used to assign probabilities of duration for different levels of the demand
deposits.