Efficient Portfolio Management for a Commercial Bank under CEV Model

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Abstract

Considering the adverse effect of Corona virus on the financial market, there is need for banks to develop efficient portfolio strategy that is compact and takes into consideration the volatility of the stock market price. As a result of this, the efficient portfolio management for a commercial bank under constant elasticity of variance (CEV) model is studied using exponential utility function. A portfolio comprising of treasury security, marketable security and a loan is considered such that the last two assets are modelled by CEV model. Furthermore, the power transformation and change of variable technique are use to obtain explicit solutions of the optimal portfolio strategies, value function, bank’s total assets, deposits and capital with numerical simulations. Finally, based on the investment strategies employ by the bank, the bank’s asset is higher than that of its liability showing that the bank makes profit.

Keywords: Efficient portfolio management, Commercial bank, Power transformation,,

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