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The banking firm and risk taking in a two-moment decision model

Author

Listed:
  • Broll, Udo
  • Guo, Xu
  • Welzel, Peter
  • Wong, Wing-Keung

Abstract

We analyze a bank's risk taking in a two-moment decision framework. Our approach offers desirable properties like simplicity, intuitive interpretation, and empirical applicability. The bank's optimal behavior to a change in the standard deviation or the expected value of the risky asset's or portfolio's return can be described in terms of risk aversion elasticities, i.e., the sensitivity of the marginal rate of substitution between risk and return. The bank's investment in a risky asset position goes down when the return risk increases, if and only if the risk aversion elasticity exceeds −1.

Suggested Citation

  • Broll, Udo & Guo, Xu & Welzel, Peter & Wong, Wing-Keung, 2015. "The banking firm and risk taking in a two-moment decision model," Economic Modelling, Elsevier, vol. 50(C), pages 275-280.
    • Handle: RePEc:eee:ecmode:v:50:y:2015:i:c:p:275-280
    DOI: 10.1016/j.econmod.2015.06.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk taking; Banking firm; Elasticity of risk aversion; Preferences;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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