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

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.

[1]  Edward E. Schlee,et al.  Mean‐Variance Preferences and Investor Behaviour , 2001 .

[2]  H. Schneeweiß,et al.  Entscheidungskriterien bei Risiko , 1967 .

[3]  Udo Broll,et al.  Insurance demand and the elasticity of risk aversion , 2002, OR Spectr..

[4]  Jack Meyer,et al.  Two Moment Decision Models And Expected Utility Maximization: Some Implications For Applied Research , 1988 .

[5]  K. Davis.  The Bankers' New Clothes, by Anat Admati and Martin Hellwig (Princeton University Press, Princeton, 2013), pp. xv + 398. , 2013 .

[6]  Kit Pong Wong,et al.  On the determinants of bank interest margins under credit and interest rate risks , 1997 .

[7]  Udo Broll,et al.  Utility functions of equivalent form and the effect of parameter changes on optimum decision making , 2008 .

[8]  George K. Davis.  Income and Substitution Effects for Mean-Preserving Spreads , 1989 .

[9]  J. Rochet,et al.  Microeconomics of banking , 1997 .

[10]  Louis Eeckhoudt,et al.  Changes in Background Risk and Risk Taking Behavior , 1996 .

[11]  Andreas Wagener,et al.  Portfolio allocation and asset demand with mean-variance preferences , 2011 .

[12]  Alaa Chateauneuf,et al.  Increases In Risk and Demand for Risky Asset , 2005 .

[13]  J. Dermine.  Deposit rates, credit rates and bank capital: The Klein-Monti Model Revisited , 1986 .

[14]  Andreas Löffler.  Variance Aversion Impliesμ−σ2-Criterion , 1996 .

[15]  Michael A. Klein.  A Theory of the Banking Firm , 1971 .

[16]  T. Eichner,et al.  Insurance demand and first-order risk increases under (μ,σ)-preferences revisited , 2014 .

[17]  H. Sinn.  Economic Decisions Under Uncertainty , 1983 .

[18]  Greg Filbeck,et al.  Investment Risk Management , 2015 .

[19]  P. Welzel,et al.  Regulation, Credit Risk Transfer with CDS, and Bank Lending , 2011, SSRN Electronic Journal.

[21]  Fatma Lajeri-Chaherli.  ON THE CONCAVITY AND QUASICONCAVITY PROPERTIES OF (σ,μ) UTILITY FUNCTIONS , 2016 .

[22]  Fatma Lajeri-Chaherli.  Proper and Standard Risk Aversion in Two-Moment Decision Models , 2004 .