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A Contingent Claim Approach to Bank Valuation

Owoloko, E. A. and Omoregbe, N. A. and Okedoye, A.M. (2014) A Contingent Claim Approach to Bank Valuation. Journal of Mathematical Finance. pp. 234-244.

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In this paper, the model formulated incorporated stochastic variables such as bank loans and deposits as well as some deterministic variables: cash available, depreciation, capital expenditure, tax and costs, comprising variable costs and fixed costs. This paper assumes that the dynamics of bank loans and deposits at time t follow a geometric Brownian motion, therefore, it satisfies certain stochastic differential equations (SDEs) formulated on some probability space. On the other hand, the growth rate μL(t) in loan at time t, growth rate μD(t) in deposit at time t, and the variable cost η(t) at time t are assumed to be driven by mean-reverting Ornstein-Uhlenbeck processes. The SDEs of the dynamics of bank loans, growth rate in loans, bank deposits, growth rate in deposits and variable cost arising from the model were solved by means of the ItÔ Lemma. Discrete time approximations of the exact solutions of the SDEs were derived and used in a Monte Carlos simulation software

Item Type: Article
Uncontrolled Keywords: Brownian Motion, Stochastic Differential Equation, Mean-Reverting Ornstein-Uhlenbeck Processes, ItÔ Lemma, Discounted Cash Flow
Subjects: Q Science > QA Mathematics
Divisions: Faculty of Engineering, Science and Mathematics > School of Mathematics
Depositing User: Mrs Patricia Nwokealisi
Date Deposited: 28 Oct 2015 09:23
Last Modified: 28 Oct 2015 09:23

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