Optimal financial crises

Article Abstract:

Empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of "sunspots." Panics occur when depositors perceive that the returns on bank assets are going to be unusually low. We develop a simple model of this. In this setting, bank runs can be first-best efficient: they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios. However, if costly runs or markets for risky assets are introduced, central bank intervention of the right kind can lead to a Pareto improvement in welfare. (Reprinted by permission of the publisher.)

Commercial Banks, Commercial Banking, DEPOSITORY INSTITUTIONS, Deposit Money Banks, Analysis, Bank runs, Deposit banking, Depositories (Banking)

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Optimal risk management using options

Article Abstract:

Research into an analytical approach to optimal risk management has used a framework based on the assumption that the institution's risk management criteria is Value-at-Risk and that the hedging strategy involves options, instead of swaps, forwards or futures. It has been established that the optimal strategy involves a hedge position in a single option with a strike price not dependent on the level of cost the institution is prepared to incur for its hedge program. The cost/Value-at-Risk frontier is therefore linear.

Risk management

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