Annals of Operations Research

, Volume 45, Issue 1, pp 243–264 | Cite as

Optimal bank portfolio choice under fixed-rate deposit insurance

  • Anlong Li
Article

Abstract

This paper analyzes the investment decisions of insured banks under fixed-rate deposit insurance. The model takes into account the charter value and allows banks to dynamically revise their asset portfolios. Trade-offs exist between preserving the charter and exploiting deposit insurance. The optimal bank portfolio problem is solved analytically for a constant charter value. In any audit period, banks maximize their risk exposure before some critical time and act cautiously thereafter. The corresponding deposit insurance is shown to be a put option that matures at this critical time rather than at the audit date.

Keywords

Investment Decision Critical Time Risk Exposure Deposit Insurance Portfolio Choice 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© J.C. Baltzer AG, Science Publishers 1993

Authors and Affiliations

  • Anlong Li
    • 1
  1. 1.Department of Operations Research, Weatherhead School of ManagementCase Western Reserve UniversityClevelandUSA

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