Title: Oil prices and banking instability: A jump-diffusion model for bank capital structure
Authors: Samar Issa - Saint Peters University (United States) [presenting]
Willi Semmler - New School for Social Research (United States)
Abstract: An empirical model of bank capital structure is developed to study the impact of large oil shocks on overleveraging of banks which then present severe challenges for banks balance sheet management. The measure of overleveraging incorporates a jump-diffusion component that captures the jump size and intensity of oil prices and political instability predictors. Overleveraging is derived and estimated for a sample of six banks in three oil-producing countries and Western countries using Markov Chain Monte Carlo method, for the years 2006-2016. The estimation of the optimal debt shows that most of the banks in this context had a high optimal debt around 2008, overlapping with the oil price shock. In addition, most of the predictors, namely oil prices and political instability factors proxied by terrorism, political corruption, and military expenses, regularly appeared in volatility and jump intensity factors.