Optimal CAR simulation

Fatma Chakroun and Fathi Abid ()
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Fatma Chakroun: University of Sfax, Faculty of Economics and Management, UR
Fathi Abid: University of Sfax, Faculty of Economics and Management, UR

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 04, 1-31

Abstract: The present paper is conceived to expose a new model of bank capital adequacy. Our analysis highly relies on the dynamics of the capital adequacy ratio (CAR) as computed from balance sheet items, namely, loans, securities and bank regulatory capital, in a stochastic dynamic setting. In addition, an attempt is made to demonstrate how the CAR can be optimized in terms of asset allocation and the rate at which the bank remains solvent. Consequently, a dynamic programming principle has been applied to solve the Hamilton–Jacobi–Bellman (HJB) equation explicitly in the case of CRRA utility function. The parameters’ estimation is based on the maximum likelihood method, using Tunisian data relevant to the period 2004–2012. As regard computations, they are carried out in MATLAB. The simulation results have shown the model relevance as a decision tool for bank risk management. Moreover, the relationship persisting between the macroeconomic activity and the bank capital adequacy has also been discussed.

Keywords: Bank CAR; stochastic optimization; maximum likelihood; simulation (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S2424786315500358

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