A Contingent Claim Approach to Bank Valuation - Journal of Mathematical Finance

JMF > Vol.4 No.4, August 2014

Journal of Mathematical Finance

Volume 4, Issue 4 (August 2014)

ISSN Print: 2162-2434 ISSN Online: 2162-2442

Google-based Impact Factor: 0.87 Citations h5-index & Ranking

A Contingent Claim Approach to Bank Valuation ()

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Download as PDF (Size: 2583KB) PP. 234-244

DOI: 10.4236/jmf.2014.44020 3,016 Downloads 4,263 Views Citations

Author(s)

Enahoro Alfred Owoloko, Nicholas Amienwan Omoregbe, Michael Akindele Okedoye

Affiliation(s)

Department of Computer and Information Sciences/Mathematics, Covenant University, P.M.B. 1023, Ota, Ogun State, Nigeria.

ABSTRACT

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 μ_L(t) in loan at time t, growth rate μ_D(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.

KEYWORDS

Brownian Motion, Stochastic Differential Equation, Mean-Reverting Ornstein-Uhlenbeck Processes, ItÔ Lemma, Discounted Cash Flow

Share and Cite:

Owoloko, E. , Omoregbe, N. and Okedoye, M. (2014) A Contingent Claim Approach to Bank Valuation. Journal of Mathematical Finance, 4, 234-244. doi: 10.4236/jmf.2014.44020.

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