Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099680 | Journal of Economic Dynamics and Control | 2010 | 23 Pages |
Abstract
We analyze a bank that operates under the Basel credit and market risk requirements, and that maximizes its value through recapitalizations, dividends, and liquid asset investments. According to our model, the market risk requirement may postpone recapitalization and this way increase the bank's default probability. We show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high, i.e., then the market risk requirement raises the default probability of the bank. In this sense the market risk requirement is inefficient.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Jussi Keppo, Leonard Kofman, Xu Meng,