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Risk management under a prudential policy

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  • Hirbod Assa

Abstract

In this paper, we study the structure of optimal contracts in banking system when there is no risk of moral hazard. We consider a risk management problem under a policy that reduces the excessive risk-taking behavior by making all banks bear part of the risk that they transfer to other parties in the market. First, we characterize the optimal solutions to the risk management problem, and, second, we find a necessary and sufficient condition under which the “risk of the tail events” will not be transferred. In particular, we will study the problem using two known risk measures, value at risk and conditional value at risk, and will show that in these cases, the optimal solutions are in the form of stop-loss policies. Copyright Springer-Verlag Italia 2015

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  • Hirbod Assa, 2015. "Risk management under a prudential policy," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 217-230, October.
    • Handle: RePEc:spr:decfin:v:38:y:2015:i:2:p:217-230
    DOI: 10.1007/s10203-015-0165-x
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    References listed on IDEAS

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    Cited by:

    1. Giovanni Bonaccolto, 2019. "Critical Decisions for Asset Allocation via Penalized Quantile Regression," Papers 1908.04697, arXiv.org.
    2. Giovanni Bonaccolto, 2021. "Quantile– based portfolios: post– model– selection estimation with alternative specifications," Computational Management Science, Springer, vol. 18(3), pages 355-383, July.
    3. Hirbod Assa & Mostafa Pouralizadeh & Abdolrahim Badamchizadeh, 2019. "Sound Deposit Insurance Pricing Using a Machine Learning Approach," Risks, MDPI, vol. 7(2), pages 1-18, April.

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    More about this item

    Keywords

    Deposit insurance; Risk measure and premium; Black–Scholes model; Moral hazard; Tail events; VaR; CVaR; Stop-loss policy; G21; G22;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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