Skip to main content
SpringerLink
Log in

The perspective of a bank in granting credits: an optimization model

  • Original Paper
  • Published:
Optimization Letters Aims and scope Submit manuscript

Abstract

In this work, a model for legal financiers’ strategies is presented, taking into account that the aim of a bank is to minimize the default probability of the funded company, constrained with reaching a certain profit level. To obtain our purpose, a stochastic dynamics optimization model is constructed and solved in closed form and a Monte Carlo simulation involving empirical data is also implemented. The financial strategies are thus obtained.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Altman E.I.: Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J. Finance 68(4), 589–611 (1968)

    Google Scholar 

  2. Altman E.I.: Measuring corporate bond mortality and performance. J. Finance 44(4), 909–922 (1989)

    Google Scholar 

  3. Altman E.I., Caouette J.B., Narayan P.: Managing Credit Risk. The Next Great Financial Challenge. Wiley Frontiers in Finance, New York (1998)

    Google Scholar 

  4. Altman E.I., Haldeman R.G., Narayan P.: ZETA analysis: a new model to identify bankruptcy risk of corporations. J. Bank. Finance 1, 29–54 (1977)

    Article  Google Scholar 

  5. Altman E.I., Sabato G.: Effects of the new basel capital accord on bank capital requirements for SMEs. J. Financ. Serv. Res. 28, 15–42 (2005)

    Article  Google Scholar 

  6. Altman E.I., Saunders A.: Credit risk measurement: developments over the last 20 years. J. Bank. Finance 21, 1721–1742 (1998)

    Article  Google Scholar 

  7. Anderson R., Sundaresan S.: A comparative study of structural models of corporate bond yields: an exploratory investigation. J. Bank. Finance 24, 255–269 (2000)

    Article  Google Scholar 

  8. Baesens B., Gestel T.V., Viaene S., Stepanova M., Suykens J., Vanthienen J.: Benchmarking state-of-the art classification algorithms for credit scoring. J. Oper. Res. Soc. 54, 627–635 (2003)

    Article  MATH  Google Scholar 

  9. Baourakis G., Conisescu M., Van Dijk G., Pardalos P.M., Zopounidis C.: A multicriteria approach for rating the credit risk of financial institutions. Comput. Manag. Sci. 6, 347–356 (2009)

    Article  MathSciNet  MATH  Google Scholar 

  10. Barone, R., Cerqueti, R., Quaranta, A.G.: Illegal financier and usurer behavior. Eur. J. Law Econ. (2011, in press)

  11. Borkar V.S.: Optimal Control of Diffusion Processes. Pitman Research Notes in Mathematics Series. Longman Scientific & Technical, Harlow (1989)

  12. Brennan M., Schwartz E.: Corporate income taxes, valuation, and the problem of optimal capital structure. J. Bus. 51, 103–114 (1978)

    Article  Google Scholar 

  13. Caballero R.J., Pindyck R.S.: Uncertainty, investment, and industry evolution. Int. Econ. Rev. 37, 641–662 (1996)

    Article  MATH  Google Scholar 

  14. Carrara D., Cavalli E.: Bankruptcy Prediction. In: Bertocchi, M., Cavalli, E., Komlosi, S. (eds) Modelling Techniques for Financial Markets and Bank Management, Springer, Heidelberg (1996)

    Google Scholar 

  15. Cifarelli M.D., Masciandaro D., Peccati L., Salsa S., Tagliani A.: Success or failure of a firm under different financing policies: a dynamic stochastic model. Eur. J. Oper. Res. 136(3), 471–482 (2002)

    Article  MathSciNet  MATH  Google Scholar 

  16. Dixit A.: Hysteresis, import penetration, and exchange-rate pass-through. Q. J. Econ. 104, 205–228 (1989)

    Article  Google Scholar 

  17. Duan J.C.: Maximum likelihood estimation using price data of the derivative contracts. Math. Finance 4, 155–167 (1994)

    Article  MATH  Google Scholar 

  18. Duan, J.C., Gautier, G., Simonato, S., Zaanouns, S.: Estimating Merton’s model by maximum likelihood with survivorship consideration. In: European Financial Association Conference—Maastricht Meeting Papers no. 4190 (2004)

  19. Fleming W.H., Soner H.M.: Controlled Markov Processes and Viscosity Solutions. Applications of Mathematics (New York). Springer, New York (1993)

    Google Scholar 

  20. Gilbert L., Menon K., Schwartz K.: Predicting bankruptcy for firm in financial distress. J. Bus. Finance Account. 17, 161 (1990)

    Article  Google Scholar 

  21. Gordy M.B.: A comparative anatomy of credit risk models. J. Bank. Finance 24(1–2), 119–149 (2000)

    Article  Google Scholar 

  22. Gordy M.B.: A risk-factor model foundation for ratings-based bank capital ratios. J. Financ. Intermediation 12, 199–232 (2003)

    Article  Google Scholar 

  23. Krouse C.G., Lee W.Y.: Optimal equity financing of the corporation. J. Financ. Quant. Anal. 8, 539–563 (1973)

    Article  Google Scholar 

  24. Krylov N.V.: Controlled Diffusion Processes. Springer, New York (1980)

    MATH  Google Scholar 

  25. Leahy, J.: The optimality of myopic behavior in a competitive model of entry and exit. Discussion Paper No. 1566, Harvard University, August 1991

  26. Leland H.: Corporate debt value, bond covenants, and optimal capital structure. J. Finance 49(4), 1213–1252 (1994)

    Google Scholar 

  27. Leland H., Toft K.B.: Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. J. Finance 51(3), 987–1019 (1996)

    Google Scholar 

  28. Li, Y., MacLean, L.C., Ziemba, W.T.: Security and wealth aspects of optimal capital growth models with minimum expected time criteria. Mimeo, University of British Columbia (1996)

  29. Longstaff F., Schwartz E.: A simple approach to valuing risky debt. J. Finance 50, 789–821 (1995)

    Google Scholar 

  30. Masciandaro D.: In offense of usury laws: microfoundations of illegal credit contracts. Eur. J. Law Econ. 12(3), 193–215 (2001)

    Article  Google Scholar 

  31. Masciandaro, D., Peccati, L., Tagliani, A.: Why Usury Can Be Cheaper? pp. 453–468. Atti del XXI Convegno A.M.A.S.E.S, Rome (1997)

  32. Modigliani F., Miller M.: The cost of capital corporation finance, and the theory of investment. Am. Econ. Rev. 48, 261–277 (1958)

    Google Scholar 

  33. Merton R.C.: On the pricing of corporate debt: the risk structure of interest rates. J. Finance 29, 449–470 (1974)

    Google Scholar 

  34. Øksendal B.: Stochastic Differential Equations. An Introduction with Applications, 4th edn. Universitext, Springer, Berlin (1995)

    Google Scholar 

  35. Pardalos, P.M., Tsitsiringos, V. (eds): Financial Engineering, E-commerce and Supply Chain (Applied Optimization). Kluwer, Dordrecht (2002)

    Google Scholar 

  36. Sethi S.P.: Optimal equity financing model of Krouse and Lee: corrections and extensions. J. Financ. Quant. Anal. 13(3), 487–505 (1978)

    Article  Google Scholar 

  37. Sethi S.P., Taksar M.I.: Optimal financing of a corporation subject to random returns. Math. Finance 12(2), 155–172 (2002)

    Article  MathSciNet  MATH  Google Scholar 

  38. Yong J., Zhou X.Y.: Stochastic Controls. Hamiltonian Systems and HJB Equations. Applications of Mathematics. Springer, New York (1999)

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economic and Financial Institutions, University of Macerata, Via Crescimbeni, 20, Macerata, Italy

    Roy Cerqueti

  2. Department of Mathematics, Faculty of Economics, Alma Mater Studiorum, University of Bologna, Viale Filopanti, 5, Bologna, Italy

    Anna Grazia Quaranta

Authors
  1. Roy Cerqueti
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Anna Grazia Quaranta
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Roy Cerqueti.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Cerqueti, R., Quaranta, A.G. The perspective of a bank in granting credits: an optimization model. Optim Lett 6, 867–882 (2012). https://doi.org/10.1007/s11590-011-0310-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11590-011-0310-6

Keywords

Search

Navigation