A Dynamic Structural Model of a Bank with Correlated Assets
31 Pages Posted: 18 Aug 2014 Last revised: 13 Nov 2017
Date Written: September 6, 2016
I value the liabilities of a bank whose assets consist mainly of loans. Specifically, the bank’s assets consist of multiple correlated securities, which could be some mixture of loans and non-lending assets. My model extends the work of Atreya, Mjøs, and Persson (2015), in which the bank’s assets consist of one loan at a time. Modeling the bank’s assets as a portfolio of loan securities allows me to quantify the effect of intra portfolio correlation on the value of the bank’s liabilities.
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