Commercial Bank Portfolio Behavior and Endogenous Uncertainty



    Search for more papers by this author
    • Associate Professor of Finance, Division of Finance, University of Oklahoma, Norman, Oklahoma. I would like to thank two anonymous referees for substantive comments, which led to a significant improvement in this paper.


This paper demonstrates how Bayesian information may be analyzed as a variable input in determining an optimal bank portfolio and investigates the impact of information in a way that is statistically satisfactory. A portfolio model is developed, and the impact of information is analyzed. Information is treated as an economic input that is used up to the point where its predicted marginal benefit is exactly equal to its marginal cost, and, from there, the optimal demand for information is derived. A comparative-static analysis demonstrates that the reaction of optimal portfolio holdings to interest rate changes under variable uncertainty is dramatically different from portfolio behavior when uncertainty is exogenous. Finally, the elasticity of reserves with respect to scale is examined under the assumption of variable uncertainty.