Precautionary Measures for Credit Risk Management in Jump Models

Masahiko Egami and Kazutoshi Yamazaki

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: Sustaining efficiency and stability by properly controlling the equity to asset ratio is one of the most important and difficult challenges in bank management. Due to unexpected and abrupt decline of asset values, a bank must closely monitor its net worth as well as market conditions, and one of its important concerns is when to raise more capital so as not to violate capital adequacy requirements. In this paper, we model the tradeoff between avoiding costs of delay and premature capital raising, and solve the corresponding optimal stopping problem. In order to model defaults in a bank’s loan/credit business portfolios, we represent its net worth by appropriate L´evy processes, and solve explicitly for the double exponential jump diffusion process. In particular, for the spectrally negative case, we generalize the formulation using the scale function, and obtain explicitly the optimal solutions for the exponential jump diffusion process.

Keywords: Credit risk management; Double exponential jump diffusion; Spectrally negative Levy processes; Scale functions; Optimal stopping (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-10-001.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kue:dpaper:e-10-001

Access Statistics for this paper

More papers in Discussion papers from Graduate School of Economics Project Center, Kyoto University Contact information at EDIRC.
Bibliographic data for series maintained by Graduate School of Economics Project Center ().