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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.
Citation
Applied Mathematics Research eXpress, 2016, v. 216, 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

 

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, p. 281-288-
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. -
dc.relation.ispartofApplied Mathematics Research eXpress-
dc.rightsPre-print: Journal Title] ©: [year] [owner as specified on the article] Published by Oxford University Press [on behalf of xxxxxx]. All rights reserved. Pre-print (Once an article is published, preprint notice should be amended to): This is an electronic version of an article published in [include the complete citation information for the final version of the Article as published in the print edition of the Journal.] Post-print: This is a pre-copy-editing, author-produced PDF of an article accepted for publication in [insert journal title] following peer review. The definitive publisher-authenticated version [insert complete citation information here] is available online at: xxxxxxx [insert URL that the author will receive upon publication here]. -
dc.titleExpectation Dependence: The Banking Firm Under Risk-
dc.typeArticle-
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hk-
dc.identifier.authorityWong, KP=rp01112-
dc.identifier.doi10.1093/amrx/abw005-
dc.identifier.hkuros269369-
dc.identifier.volume216-
dc.identifier.spage281-
dc.identifier.epage288-

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