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Article: Expectation Dependence: The Banking Firm Under Risk

TitleExpectation Dependence: The Banking Firm Under Risk
Authors
Issue Date2016
PublisherOxford University Press. The Journal's web site is located at http://amrx.oxfordjournals.org
Citation
Applied Mathematics Research eXpress, 2016, v. 216 n. 2, p. 281-288 How to Cite?
AbstractThis paper examines the optimal lending and hedging decisions of a bank facing uncertain returns on its loans. The bank's preferences are state-dependent in that the utility function depends on a state variable, i.e. the business cycle of the economy. The purpose of this paper is to complement the results of the banking literature. To characterize the bank's optimal use of financial instruments to hedge, we show that the concept of expectation dependence (Wright, 1987) is useful. While the current hedging literature specifies price risk as a monotonically increasing or decreasing function of the state-variable plus noise, expectation dependence provides much more general bivariate dependence structure. The bank's optimal futures position is an under-hedge or an over-hedge, depending on whether the random return on loans is positively or negatively correlated with the business cycle of the economy in the sense of expectation dependence, respectively. The bank as such takes dependencies into consideration when devising its optimal hedging strategy.
Persistent Identifierhttp://hdl.handle.net/10722/234855
ISSN
2015 SCImago Journal Rankings: 0.779
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorBroll, U-
dc.contributor.authorWelzel, P-
dc.contributor.authorWong, KP-
dc.date.accessioned2016-10-14T13:49:41Z-
dc.date.available2016-10-14T13:49:41Z-
dc.date.issued2016-
dc.identifier.citationApplied Mathematics Research eXpress, 2016, v. 216 n. 2, p. 281-288-
dc.identifier.issn1687-1200-
dc.identifier.urihttp://hdl.handle.net/10722/234855-
dc.description.abstractThis paper examines the optimal lending and hedging decisions of a bank facing uncertain returns on its loans. The bank's preferences are state-dependent in that the utility function depends on a state variable, i.e. the business cycle of the economy. The purpose of this paper is to complement the results of the banking literature. To characterize the bank's optimal use of financial instruments to hedge, we show that the concept of expectation dependence (Wright, 1987) is useful. While the current hedging literature specifies price risk as a monotonically increasing or decreasing function of the state-variable plus noise, expectation dependence provides much more general bivariate dependence structure. The bank's optimal futures position is an under-hedge or an over-hedge, depending on whether the random return on loans is positively or negatively correlated with the business cycle of the economy in the sense of expectation dependence, respectively. The bank as such takes dependencies into consideration when devising its optimal hedging strategy.-
dc.languageeng-
dc.publisherOxford University Press. The Journal's web site is located at http://amrx.oxfordjournals.org-
dc.relation.ispartofApplied Mathematics Research eXpress-
dc.rightsPost-print: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in [Applied Mathematics Research eXpress] following peer review. The definitive publisher-authenticated version [Applied Mathematics Research eXpress, 2016, v. 216 n. 2, p. 281-288] is available online at: http://dx.doi.org/10.1093/amrx/abw005-
dc.titleExpectation Dependence: The Banking Firm Under Risk-
dc.typeArticle-
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hk-
dc.identifier.authorityWong, KP=rp01112-
dc.description.naturepostprint-
dc.identifier.doi10.1093/amrx/abw005-
dc.identifier.hkuros269369-
dc.identifier.volume216-
dc.identifier.issue2-
dc.identifier.spage281-
dc.identifier.epage288-
dc.identifier.isiWOS:000398374000003-
dc.publisher.placeUnited Kingdom-

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