 A barrier option framework for bank interest margin management under anticipatory regret aversionJyh-Horng Lin and Wei-Ming Hung Economic Modelling, 2013, vol. 33, issue C, 794-801 Abstract: This paper proposes a framework for bank equity valuation based on a path-dependent, barrier option model. A direct implication of this framework is that bank equity will be priced as a down-and-out call option. Using this approach, we examine how bank interest margin, i.e., the spread between the loan rate and the deposit rate, is determined when a bank is regret-averse. Regret-averse preferences are characterized by a down-and-in call, which is specified as the difference between a standard call and a down-and-out call. The model demonstrates how anticipatory regret aversion and the default barrier jointly determine an optimal bank interest margin decision. We find that a bank interest margin with a low level of default barrier is negatively related to anticipatory regret aversion and to the default barrier. Regret aversion and default barriers make a bank less prudent and more prone to risk-taking, thereby adversely affecting the stability of the banking system. Keywords: Bank interest margin; Regret aversion; Barrier option; Bank equity valuation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:33:y:2013:i:c:p:794-801 DOI: 10.1016/j.econmod.2013.06.007 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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