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Assessing the risk-return trade-off in loan portfolios

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  • Mencía, Javier
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    Abstract

    This paper proposes a methodology to analyse the risk and return of large loan portfolios in a joint setting. I propose a tractable model to obtain the distribution of loan returns from observed interest rates and default frequencies. I follow a sectoral approach that captures the heterogeneous cyclical features of different kinds of loans and yields moments in closed form. I investigate the validity of mean–variance analysis with a value at risk constraint and study its relationship with utility maximisation. Finally, I study the efficiency of corporate and household loan portfolios in an empirical application to the Spanish banking system.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 6 ()
    Pages: 1665-1677

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:6:p:1665-1677

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Credit risk; Multivariate distribution; Probability of default; Asset pricing; Risk aversion;

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