A new approach to optimal capital allocation for RORAC maximisation in banks
Date published
2019-06-13
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Journal ISSN
Volume Title
Publisher
Elsevier
Department
Type
Article
ISSN
0378-4266
Format
Citation
Kang W-Y, Poshakwale S. (2019) A new approach to optimal capital allocation for RORAC maximisation in banks. Journal of Banking and Finance, Volume 106, September 2019, pp. 153-165
Abstract
We introduce a new model for optimal internal capital allocation, which would allow banks to maximize their Return on Risk-Adjusted Capital (RORAC) under regulatory and capital constraints. We extend the single period model of Buch et al., (2011) to a multi-period model and improve its forecasting accuracy by including the debt effect and Bayesian learning innovations. The empirical application shows that our model significantly improves the RORAC of a sample of banks listed in the S&P 500 index.
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Github
Keywords
Regulatory risk, Economic capital, Optimal capital allocation, Banks, Euler principle
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Attribution-NonCommercial-NoDerivatives 4.0 International