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

Udo Broll, Xu Guo, Peter Welzel () and Wing-Keung Wong

Economic Modelling, 2015, vol. 50, issue C, 275-280

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.

Keywords: Risk taking; Banking firm; Elasticity of risk aversion; Preferences (search for similar items in EconPapers)
JEL-codes: D01 D81 G11 G21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:50:y:2015:i:c:p:275-280

DOI: 10.1016/j.econmod.2015.06.016

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