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Dynamic risk management of the lending rate policy of an interacted portfolio of loans via an investment strategy into a discrete stochastic framework

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  • Pantelous, Athanasios A.
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    Abstract

    Lending rate policy via an appropriate investment strategy for an interacted portfolio of loans into discrete stochastic framework is examined in this paper. A bank optimization model with several control variables, stochastic inputs and a smoothness criterion described by a quadratic functional is proposed for managing the task. The state variable of the system corresponds to the accumulated surplus profit or loss can oscillates deliberately absorbing fluctuations in the different parameters involved. The theoretical model is solved using standard linearization and advanced stochastic optimization techniques resulting in analytic formulae for the control variables. These solutions are actually feedback mechanisms of the past accumulated surplus profit or loss of each sub-portfolio of loans. At the end, a numerical application is presented deriving a smooth solution for the development of the controllers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 25 (2008)
    Issue (Month): 4 (July)
    Pages: 658-675

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    Handle: RePEc:eee:ecmode:v:25:y:2008:i:4:p:658-675

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    Web page: http://www.elsevier.com/locate/inca/30411

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    1. Stanhouse, Bryan & Stock, Duane, 2004. "The impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1825-1843, August.
    2. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 231-235, June.
    3. Jobst, Norbert J. & Mitra, Gautam & Zenios, Stavros A., 2006. "Integrating market and credit risk: A simulation and optimisation perspective," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 717-742, February.
    4. Edelstein, Robert & Urosevic, Branko, 2003. "Optimal Loan Interest Rate Contract Design," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 127-56, March-May.
    5. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
    6. Zarruk, Emilio R. & Madura, Jeff, 1992. "Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 143-149, March.
    7. Zarruk, Emilio R., 1989. "Bank spread with uncertain deposit level and risk aversion," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 797-810, December.
    8. Fried, Joel & Howitt, Peter, 1980. "Credit Rationing and Implicit Contract Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 471-87, August.
    9. Jackson, Patricia & Perraudin, William, 2000. "Regulatory implications of credit risk modelling," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 1-14, January.
    10. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
    11. Holly,Sean & Hughes Hallet,Andrew, 2010. "Optimal Control, Expectations and Uncertainty," Cambridge Books, Cambridge University Press, number 9780521126335.
    12. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
    13. Slovin, Myron B & Sushka, Marie Elizabeth, 1983. " A Model of the Commercial Loan Rate," Journal of Finance, American Finance Association, vol. 38(5), pages 1583-96, December.
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