The banking firm and risk taking in a two-moment decision model

Udo Broll*, Xu Guo, Peter Welzel, Wing Keung Wong

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    26 Citations (Scopus)

    Abstract

    We analyze a bank's risk taking in a two-moment decision framework. Our approach offers desirable properties like simplicity, intuitive interpretation, and empirical applicability. The bank's optimal behavior to a change in the standard deviation or the expected value of the risky asset's or portfolio's return can be described in terms of risk aversion elasticities, i.e., the sensitivity of the marginal rate of substitution between risk and return. The bank's investment in a risky asset position goes down when the return risk increases, if and only if the risk aversion elasticity exceeds − 1.

    Original languageEnglish
    Pages (from-to)275-280
    Number of pages6
    JournalEconomic Modelling
    Volume50
    DOIs
    Publication statusPublished - Nov 2015

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

    • Banking firm
    • Elasticity of risk aversion
    • Preferences
    • Risk taking

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