Dynamic asset allocation for bank under stochastic interest rates.

Chakroun, Fatma and Abid, Fathi (2014): Dynamic asset allocation for bank under stochastic interest rates.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank asset allocation, Stochastic interest rates, Dynamic programming principle, HJB equation, CRRA utility.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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