Optimal risk asset allocation of a loss-averse bank with partial information under inflation risk

Jia Huang and Zheng Chen

Finance Research Letters, 2021, vol. 38, issue C

Abstract: The paper aims to solve the asset allocation problem of a loss-averse commercial bank in an environment with macroeconomic risks where inflation rates obey a mean-reverting process. The bank has only partial information about the appreciation rate of inflation. Its risk preference is described using an S-shaped utility function and then a semi-analytical investment strategy is derived through the filtering theory and inverse Fourier Transformation method. The paper finds that the investment proportion which decreases with a higher degree of information incompleteness is positively correlated with inflation risks and has a close but not monotonic relationship with the reference point.

Keywords: Bank asset allocation; Loss aversion; Partial information; Inflation risk (search for similar items in EconPapers)
JEL-codes: C61 G11 G21 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319313728

DOI: 10.1016/j.frl.2020.101513

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