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Article: Ambiguity Preferences, Risk Taking and the Banking Firm

TitleAmbiguity Preferences, Risk Taking and the Banking Firm
Authors
Issue Date2018
PublisherSpringer (part of Springer Nature): Springer Open Choice Hybrid Journals. The Journal's web site is located at http://www.springer.com/economics/journal/40822
Citation
Eurasian Economic Review, 2018, v. 8, p. 343-353 How to Cite?
AbstractThis paper examines the risk taking behavior of a banking firm facing ambiguity and possessing smooth ambiguity preferences. Ambiguity is modeled by a second-order probability distribution that captures the bank's uncertainty about which of the subjective beliefs govern the return on its loans. Ambiguity aversion is modeled by a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the random loan return. Within this framework, we show that the bank finds it less attractive to take risk in the presence than in the absence of ambiguity. This result extends to the case of greater ambiguity aversion. Given that the bank's smooth ambiguity preferences exhibit non-increasing absolute ambiguity aversion, imposing a more stringent capital requirement to the bank has the desired effect that limits the bank's incentive to take on excessive risk.
Persistent Identifierhttp://hdl.handle.net/10722/265967
ISSN
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorBroll, U-
dc.contributor.authorWelzel, P-
dc.contributor.authorWong, KP-
dc.date.accessioned2018-12-17T02:16:24Z-
dc.date.available2018-12-17T02:16:24Z-
dc.date.issued2018-
dc.identifier.citationEurasian Economic Review, 2018, v. 8, p. 343-353-
dc.identifier.issn1309-422X-
dc.identifier.urihttp://hdl.handle.net/10722/265967-
dc.description.abstractThis paper examines the risk taking behavior of a banking firm facing ambiguity and possessing smooth ambiguity preferences. Ambiguity is modeled by a second-order probability distribution that captures the bank's uncertainty about which of the subjective beliefs govern the return on its loans. Ambiguity aversion is modeled by a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the random loan return. Within this framework, we show that the bank finds it less attractive to take risk in the presence than in the absence of ambiguity. This result extends to the case of greater ambiguity aversion. Given that the bank's smooth ambiguity preferences exhibit non-increasing absolute ambiguity aversion, imposing a more stringent capital requirement to the bank has the desired effect that limits the bank's incentive to take on excessive risk.-
dc.languageeng-
dc.publisherSpringer (part of Springer Nature): Springer Open Choice Hybrid Journals. The Journal's web site is located at http://www.springer.com/economics/journal/40822-
dc.relation.ispartofEurasian Economic Review-
dc.rightsThe final publication is available at Springer via http://dx.doi.org/[insert DOI]-
dc.titleAmbiguity Preferences, Risk Taking and the Banking Firm-
dc.typeArticle-
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hk-
dc.identifier.authorityWong, KP=rp01112-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1007/s40822-018-0096-2-
dc.identifier.hkuros296271-
dc.identifier.volume8-
dc.identifier.spage343-
dc.identifier.epage353-
dc.identifier.isiWOS:000450923200001-
dc.publisher.placeGermany-

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