An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks
We employ the method of stochastic optimal control to derive the optimal investment strategy for maximizing an expected exponential utility of a commercial bank’s capital at some future date T>0. In addition, we derive a multiperiod deposit insurance (DI) pricing model that incorporates the expli...
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| Format: | Article |
| Language: | English |
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Wiley
2018-01-01
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| Series: | Journal of Applied Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2018/8942050 |
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| _version_ | 1832553273514524672 |
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| author | Grant E. Muller |
| author_facet | Grant E. Muller |
| author_sort | Grant E. Muller |
| collection | DOAJ |
| description | We employ the method of stochastic optimal control to derive the optimal investment strategy for maximizing an expected exponential utility of a commercial bank’s capital at some future date T>0. In addition, we derive a multiperiod deposit insurance (DI) pricing model that incorporates the explicit solution of the optimal control problem and an asset value reset rule comparable to the typical practice of insolvency resolution by insuring agencies. By way of numerical simulations, we study the effects of changes in the DI coverage horizon, the risk associated with the asset portfolio of the bank, and the bank’s initial leverage level (deposit-to-asset ratio) on the DI premium while the optimal investment strategy is followed. |
| format | Article |
| id | doaj-art-8592344784a44d25b2d36987d5dbcc14 |
| institution | Kabale University |
| issn | 1110-757X 1687-0042 |
| language | English |
| publishDate | 2018-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Journal of Applied Mathematics |
| spelling | doaj-art-8592344784a44d25b2d36987d5dbcc142025-02-03T05:54:30ZengWileyJournal of Applied Mathematics1110-757X1687-00422018-01-01201810.1155/2018/89420508942050An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial BanksGrant E. Muller0Department of Mathematics and Applied Mathematics, University of the Western Cape, Private Bag X17, Bellville, Cape Town 7535, South AfricaWe employ the method of stochastic optimal control to derive the optimal investment strategy for maximizing an expected exponential utility of a commercial bank’s capital at some future date T>0. In addition, we derive a multiperiod deposit insurance (DI) pricing model that incorporates the explicit solution of the optimal control problem and an asset value reset rule comparable to the typical practice of insolvency resolution by insuring agencies. By way of numerical simulations, we study the effects of changes in the DI coverage horizon, the risk associated with the asset portfolio of the bank, and the bank’s initial leverage level (deposit-to-asset ratio) on the DI premium while the optimal investment strategy is followed.http://dx.doi.org/10.1155/2018/8942050 |
| spellingShingle | Grant E. Muller An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks Journal of Applied Mathematics |
| title | An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks |
| title_full | An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks |
| title_fullStr | An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks |
| title_full_unstemmed | An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks |
| title_short | An Optimal Investment Strategy and Multiperiod Deposit Insurance Pricing Model for Commercial Banks |
| title_sort | optimal investment strategy and multiperiod deposit insurance pricing model for commercial banks |
| url | http://dx.doi.org/10.1155/2018/8942050 |
| work_keys_str_mv | AT grantemuller anoptimalinvestmentstrategyandmultiperioddepositinsurancepricingmodelforcommercialbanks AT grantemuller optimalinvestmentstrategyandmultiperioddepositinsurancepricingmodelforcommercialbanks |