We study the dynamic decision making of a financial institution in the presence of a novel implementation friction that gives rise to operational risk. We distinguish between internal and external operational risks depending on whether the institution has control over them. Internal operational risk naturally arises in the context of model risk, as the institution exposes itself to operational ...

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Our paper studies an economy in which each financial institution takes into account that if it has to sell its assets after others have already sold, the price will be lower. This causes preemptive selling, driven not by actual margin calls, but by the fear of future margin calls. Financial institutions cannot determine their optimal capitalizations in isolation, but need to know the aggregate ...

In this paper, a stochastic diffusion model of a Financial Innovation introducing to a financial institute is presented in order to validate the influence of the diffusion speed in any business line with different rates. The paper is structured in three sections. In section 1 we discuss and analyzing the FI and in section 2 we represent a stochastic process that shows the diffusion of FI, with ...