Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

WFIC 96-28

Posted: 13 Jun 1998

See all articles by Kenneth Froot

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard University - Business School (HBS)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1995

Abstract

We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: i) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations; and the pricing of unhedgeable derivatives portfolios.

JEL Classification: G31, G32

Suggested Citation

Froot, Kenneth and Stein, Jeremy C., Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach (June 1995). WFIC 96-28. Available at SSRN: https://ssrn.com/abstract=7541

Kenneth Froot (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Harvard University - Business School (HBS) ( email )

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

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