Valuing Sticky Deposits

We develop a formal fixed-income framework to value sticky deposits.This framework provides closed-form expressions for deposit values and allows us to study the impact of stickiness on deposit interest-rate and runoff risks.The duration of a bank deposit can be either positive or negative, which has important implications for hedging the interest-rate risk of bank balance sheets.Banks that maximize deposit value by following optimal deposit beta strategies may significantly increase their interest-rate and deposit runoff risks.We test the empirical implications of the valuation model using market deposit premia observed in bank merger/acquisition transactions.The results provide strong empirical support for the model's predictions.