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Real options and bank bailouts: How uncertainty affects optimal bank bailout policy

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  • VERMEULEN, Glen
  • KORT, Peter

Abstract

This paper develops a real options consistent bailout decision rule that specifies under which conditions it is optimal to liquidate or bail out a bank based on the amount of liquidity it creates. Due to its construction, the rule incorporates the option value of waiting stemming from the irreversibility of liquidation and bailout decisions and the possibility to delay. We apply the rule to various cases in order to evaluate the quality of bank bailout policy in the EU-15. The main contribution however lies in the ?first-ever application of real options analysis to the ?field of bank bailout policy.

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  • VERMEULEN, Glen & KORT, Peter, 2014. "Real options and bank bailouts: How uncertainty affects optimal bank bailout policy," Working Papers 2014021, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2014021
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    References listed on IDEAS

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