Assessing the risk-return trade-off in loans portfolios
Javier Mencia ()
No 911, Working Papers from Banco de España, Working Papers Homepage
This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed form expressions for the interest rates that banks should set in compensation for borrowers' credit risk under absence of arbitrage opportunities and I use these rates as a benchmark to interpret actual loans' prices. Finally, I study the risk-return trade-off in an empirical application to the Spanish banking system.
Keywords: Credit risk; Probability of default; Asset Pricing; Mean-Variance allocation; Stochastic Discount Factor; Value at Risk (search for similar items in EconPapers)
JEL-codes: G21 G12 G11 C32 D81 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/09/Fic/dt0911e.pdf First version, June 2009 (application/pdf)
Journal Article: Assessing the risk-return trade-off in loan portfolios (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0911
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