Journal of Applied Mathematics

Maximizing Banking Profit on a Random Time Interval

J. Mukuddem-Petersen, M. A. Petersen, I. M. Schoeman, and B. A. Tau

Full-text: Open access

Abstract

We study the stochastic dynamics of banking items such as assets, capital, liabilities and profit. A consideration of these items leads to the formulation of a maximization problem that involves endogenous variables such as depository consumption, the value of the bank's investment in loans, and provisions for loan losses as control variates. A solution to the aforementioned problem enables us to maximize the expected utility of discounted depository consumption over a random time interval, [ t , τ ] , and profit at terminal time τ . Here, the term depository consumption refers to the consumption of the bank's profits by the taking and holding of deposits. In particular, we determine an analytic solution for the associated Hamilton-Jacobi-Bellman (HJB) equation in the case where the utility functions are either of power, logarithmic, or exponential type. Furthermore, we analyze certain aspects of the banking model and optimization against the regulatory backdrop offered by the latest banking regulation in the form of the Basel II capital accord. In keeping with the main theme of our contribution, we simulate the financial indices return on equity and return on assets that are two measures of bank profitability.

Article information

Source
J. Appl. Math., Volume 2007 (2007), Article ID 29343, 22 pages.

Dates
First available in Project Euclid: 5 July 2007

Permanent link to this document
https://projecteuclid.org/euclid.jam/1183667199

Digital Object Identifier
doi:10.1155/2007/29343

Mathematical Reviews number (MathSciNet)
MR2317882

Zentralblatt MATH identifier
1151.91071

Citation

Mukuddem-Petersen, J.; Petersen, M. A.; Schoeman, I. M.; Tau, B. A. Maximizing Banking Profit on a Random Time Interval. J. Appl. Math. 2007 (2007), Article ID 29343, 22 pages. doi:10.1155/2007/29343. https://projecteuclid.org/euclid.jam/1183667199


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