Article ID: | iaor19941006 |
Country: | Switzerland |
Volume: | 45 |
Issue: | 1/4 |
Start Page Number: | 243 |
End Page Number: | 264 |
Publication Date: | Dec 1993 |
Journal: | Annals of Operations Research |
Authors: | Li Anlong |
Keywords: | portfolio analysis |
This paper analyzes the investment decisions of insured banks under fixed-rate deposit insurance. The model takes into account the charter value and allows banks to dynamically revise their asset portfolios. Trade-offs exist between preserving the charter and exploiting insurance. The optimal bank portfolio problem is solved analytically for a constant charter value. In any audit period, banks maximize their risk exposure before some critical time and act cautiously thereafter. The corresponding deposit insurance is shown to be a put option that matures at this critical time rather than at the audit date.