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Assessing the risk-return trade-off in loans portfolios

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Author Info
Javier Mencía () (Banco de España)
Abstract

This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed form expressions for the interest rates that banks should set in compensation for borrowers' credit risk under absence of arbitrage opportunities and I use these rates as a benchmark to interpret actual loans' prices. Finally, I study the risk-return trade-off in an empirical application to the Spanish banking system.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/09/Fic/dt0911e.pdf
File Format: application/pdf
File Function: First version, June 2009
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0911.

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Length: 41 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:bde:wpaper:0911

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Web page: http://www.bde.es/
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Related research
Keywords: Credit risk; Probability of default; Asset Pricing; Mean-Variance allocation; Stochastic Discount Factor; Value at Risk;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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This page was last updated on 2009-12-10.

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