Loan portfolio management and Liquidity Risk: The impact of limited liability and haircut
In this article, we consider the problem of a bank's loan portfolio in the context of liquidity risk, while allowing for the limited liability protection enjoyed by the bank. Accordingly, we construct a novel loan portfolio model with limited liability, while maintaining a threshold level of haircut in the portfolio. For the constructed three-time step loan portfolio, at the initial time, the bank raises capital via debt and equity, investing the same in several classes of loans, while at the final time, the bank either meets its liabilities or becomes insolvent. At the intermediate time step, a fraction of the deposits are withdrawn, resulting in liquidation of some of the bank's assets. The liquidated portfolio is designed with the goal of minimizing the liquidation cost. Our theoretical results show that model with the haircut constraint leads to lesser liquidity risk, as compared to the scenario of no haircut constraint being imposed. Finally, we present numerical results to illustrate the theoretical results which were obtained.
Code (0)
등록된 구현이 없습니다.
Tasks
ManagementSimilar Papers 제목 키워드 기반
Liquidity Adjustment in Multivariate Volatility Modeling: Evidence from Portfolios of Cryptocurrencies and US Stocks
We develop a liquidity-sensitive multivariate volatility framework to improve the estimation of time-varying covariance structures under market frictions. We introduce two novel portfolio-level liquidity measures, liquid…
ManagementMinimizing the Value-at-Risk of Loan Portfolio via Deep Neural Networks
Risk management is a prominent issue in peer-to-peer lending. An investor may naturally reduce his risk exposure by diversifying instead of putting all his money on one loan. In that case, an investor may want to minimiz…
Investing with Cryptocurrencies -- evaluating their potential for portfolio allocation strategies
Cryptocurrencies (CCs) have risen rapidly in market capitalization over the last years. Despite striking price volatility, their high average returns have drawn attention to CCs as alternative investment assets for portf…
ManagementDoes limited liability reduce leveraged risk?: The case of loan portfolio management
Return-risk models are the two pillars of modern portfolio theory, which are widely used to make decisions in choosing the loan portfolio of a bank. Banks and other financial institutions are subjected to limited liabili…
ManagementLiquidity Stress Testing in Asset Management -- Part 2. Modeling the Asset Liquidity Risk
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) model…
Asset ManagementManagement