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Dynamic asset allocation for bank under stochastic interest rates

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  • Chakroun, Fatma
  • Abid, Fathi

Abstract

This paper considers the optimal asset allocation strategy for bank with stochastic interest rates when there are three types of asset: Bank account, loans and securities. The asset allocation problem is to maximize the expected utility from terminal wealth of a bank's shareholders over a finite time horizon. As a consequence, we apply a dynamic programming principle to solve the Hamilton-Jacobi-Bellman (HJB) equation explicitly in the case of the CRRA utility function. A case study is given to illustrate our results and to analyze the effect of the parameters on the optimal asset allocation strategy.

Suggested Citation

  • Chakroun, Fatma & Abid, Fathi, 2014. "Dynamic asset allocation for bank under stochastic interest rates," MPRA Paper 59295, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59295
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank asset allocation; Stochastic interest rates; Dynamic programming principle; HJB equation; CRRA utility.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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