Abstract
A theoretical and computational investigation on how the expected market, credit and liquidity risks play a role in daily business decisions made by profit maximizing banks is investigated. These risks in effect interact with each other, particularly at times of stress, and they are always considered simultaneously in practice. In all the existing studies in the theory of banking firm, however, not all of these three key risks have been considered simultaneously. A theoretical framework is developed to take a full account for all of these three risks concurrently. The resulting model amounts to a dynamic equilibrium problem which involves a high dimensional nonlinear optimization. This optimization is solved by new numerical methods proposed. The numerical results are calibrated to examine the implications of the model and to shed light on the policy implications.
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González-Hermosillo, B., Li, J.X. (2008). A Banking Firm Model: The Role of Market, Liquidity and Credit Risks. In: Kontoghiorghes, E.J., Rustem, B., Winker, P. (eds) Computational Methods in Financial Engineering. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77958-2_13
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DOI: https://doi.org/10.1007/978-3-540-77958-2_13
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-77957-5
Online ISBN: 978-3-540-77958-2
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