A Two-Stage Call-Put-Pricing Frameworkfor a "Bad Bank" Solution and Bank Profitability

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Title:	A Two-Stage Call-Put-Pricing Frameworkfor a "Bad Bank" Solution and Bank Profitability
Authors:	Jou, Rosemary;Lin, Jyh-Horng
Contributors:	淡江大學國際貿易學系
Keywords:	Bank Interest Margin;Troubled Loans;Capitalization;Call Option;Put Option
Date:	2010-01-01
Issue Date:	2011-10-22 23:49:35 (UTC+8)
Abstract:	With the growth in banking bailout programs has come a growing need to understand the potential effectiveness of these policies. In particular, a "bad bank" created by regulatory authorities uses funds to buy troubled loans from its selected banks and commits additional capital to them. This paper develops a two-stage call-put pricing framework that is used to study the selected bank's interest margin determination with the bad bank's help. We find that the selected bank's call option-based interest margin is positively related to its troubled loans bought by the bad bank, and to its equity capital inflow from the bad bank. We also show that the call-put option-based value of the bad bank's equity return increases with the selected bank's equity volatility.
Relation:	International Journal of Information and Management Sciences 21(2), pp.143-156
DOI:	10.6186/IJIMS.2010.21.2.3
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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