Banking Firm and Two-Moment Decision Making

Udo Broll, Wing-Keung Wong and Mojia Wu

MPRA Paper from University Library of Munich, Germany

Abstract: The economic environment for financial institutions has become increasingly risky. Hence these institutions must find ways to manage risk of which one of the most important forms is interest rate risk. In this paper we use the mean-variance (mean-standard deviation) approach to examine a banking firm investing in risky assets and hedging opportunities. The mean-standard deviation framework can be used because our hedging model satisfies a scale and location condition. The focus of this study is on how interest rate risk affects optimal bank investment in the loan and deposit market when derivatives are available. Furthermore we explore the relationship among the first- and second-degree stochastic dominance efficient sets and the mean-variance efficient set.

Keywords: banking firm; investment; technology; risk; derivatives; hedging; (mu; sigma)-preferences; stochastic dominance. (search for similar items in EconPapers)
JEL-codes: G21 G22 (search for similar items in EconPapers)
Date: 2013-12-23
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51687

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