Aarhus University Seal / Aarhus Universitets segl

An Asset Protection Scheme for Banks Exposed to Troubled Loan Portfolios

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

We examine a specific portfolio credit derivative, an Asset Protection Scheme (APS), and its applicability as a discretionary regulatory tool to reduce asymmetric information and help restore the capital base of troubled banks. The APS can be a fair-valued contract with an appropriate structure of incentives. We apply two alternative multivariate structural default risk models: the classical Gaussian Merton model and a model based on Normal Inverse Gaussian processes. Using a data set on annual farm level data from 1996 to 2009, we use the Danish agricultural sector as a case study and price an APS on an agricultural loan portfolio. We compute the economic capital for this loan portfolio with and without an APS. Moreover, we illustrate how model risk in the form of parameter uncertainty is reduced when an APS is attached to the loan portfolio.
Original languageEnglish
JournalJournal of Economics and Finance
Pages (from-to)568-588
Number of pages22
Publication statusPublished - 2014

Bibliographical note

Campus adgang til artiklen / Campus access to the article

    Research areas

  • Asset protection scheme, Asymmetric information , Regulation, Credit risk, Portfolio credit derivative, Normal inverse Gaussian

See relations at Aarhus University Citationformats

ID: 45643404