Assessing the risk-return trade-off in loans portfolios

• Autores: Javier Mencía
• Localización: Documentos de trabajo - Banco de España, ISSN 0213-2710, Nº 11, 2009, págs. 9-42
• Idioma: inglés
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• Resumen

  • This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed form expressions for the interest rates that banks should set in compensation for borrowers' credit risk under absence of arbitrage opportunities and I use these rates as a benchmark to interpret actual loans' prices. Finally, I study the risk-return trade-off in an empirical application to the Spanish banking system.