The Real Options Model of Optimal Timing in Banks’ Write-off Decisions under Dynamic Circumstance

Abstract

This paper employs a real option approach to evaluate the value of the option to delay write-offs non-performing loans
(NPLs) in commercial banks. On the assumption that the callback rate of NPLs follows the standard geometric Bronian and
the reinvestment return follows jump-diffusion model, the partial differential equation which the value keep to is obtained
using dynamic programming technique. With the condition of value-matching and smooth-pasting, the solution of the
equation is obtained. The optimal timing in banks’ writing off their NPLs is gained with the solution, along with the condition
to put off disposal of NPLs.