Optimal risk and liquidity management with costly refinancing opportunities
نویسنده
چکیده
In this paper we study risk and liquidity management decisions within an insurance firm. Risk management corresponds to decisions regarding proportional reinsurance, whereas liquidity management has two components: distribution of dividends and costly equity issuance. Contingent on whether proportional or fixed costs of reinvestment are considered, singular stochastic control or stochastic impulse control techniques are used to seek strategies that maximize the firm value. We find that, in a proportional-costs setting, the optimal strategies are always mixed in terms of risk management and refinancing. In contrast, when fixed issuance costs are too high relative to the firm’s profitability, optimal management does not involve refinancing. We provide analytical specifications of the optimal strategies, as well as a qualitative analysis of the interaction between refinancing and risk management. © 2014 Elsevier B.V. All rights reserved.
منابع مشابه
Home is Where the Equity Is: Liquidity Constraints, Refinancing and Consumption
This paper documents the extent to which homeowners use housing equity to smooth their marginal utility of consumption over time. Unlike drawing down other forms of saving, accessing accumulated home equity can be quite costly. As a result, households accumulating home equity could be liquidity constrained in the sense that they would like to access this equity to fund consumption but are unwil...
متن کاملHome is Where the Equity Is: Mortgage Refinancing and Household Consumption
This paper documents the extent to which homeowners use housing equity to smooth their consumption over time. Unlike drawing down other forms of saving, accessing accumulated home equity can be quite costly. Theoretically and empirically, a key distinction can be drawn between those refinancing their home mortgage to improve their wealth position from those who had a consumption smoothing motiv...
متن کاملEffect of Asset and Liability management on Liquidity risk of Iranian Banks
In financial markets, the main component of risk management is liquidity risk. Asset and Liability Management (ALM) strategy is concerned with managing all risks. Asset and liability management seeks to manage liquidity risk, which refers to both the liquidity of markets and which assets can be translated into cash. The liquidity is importantly affected by the management of banks’ balance sheet...
متن کاملFixed- and Variable-Rate Tenders in the Management of Liquidity by the Eurosystem: Implications of the Recent Credit Crisis
Most liquidity-providing operations of the European Central Bank (ECB) have been conducted through variable-rate tenders. However, fixed rates were first employed in the main refinancing operations (MROs) and are still used in other liquidity management operations. In October 2008, the ECB decided to carry MROs again at a fixed rate. In a simple threestage game in which banks can obtain liquidi...
متن کاملSystemic risk and the refinancing ratchet effect
The combination of rising home prices, declining interest rates, and near-frictionless refinancing opportunities can create unintentional synchronization of homeowner leverage, leading to a ‘‘ratchet’’ effect on leverage because homes are indivisible and owner-occupants cannot raise equity to reduce leverage when home prices fall. Our simulation of the U.S. housing market yields potential losse...
متن کامل