Partial state-owned bank interest margin, default risk, and structural breaks: a model of financial engineering

Authors:
Jyh-Horng Lin;Ching-Hui Chang;Rosemary Jou
Affiliations:
Graduate Institute of International Business, Tamkang University, Taiwan;Graduate Department of Applied Statistics and Information Science, Ming Chuan University, Taiwan;Graduate Institute of Management Sciences, Tamkang University, Taiwan
Venue:
WSEAS Transactions on Mathematics
Year:
2010

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Abstract

Recent reports demonstrate that the grip of nationalism is tightest in banking (Economist, 2009a), and in France and Britain, politicians powering taxpayers' money into ailing banks are demanding that the cash be lent at home (Economist, 2009b). This paper proposes a call option model for bank interest margin and default risk valuation based on an event-dependent, structural break framework under the return of banking nationalization. The primary feature is the existence of the discontinuity and fat tails of asset returns and risks caused by structural changes. We show that an increase in the structural breaks in mean return discontinuity and volatility fluctuation caused by the increasing degree of the bank's partial nationalization increases the bank's interest margin and default risk. We conclude that nationalization may be a high return-volatility structure break.