Deposit insurance pricing under GARCH

Hailong Liu, Rui Li and Jinjian Yuan

Finance Research Letters, 2018, vol. 26, issue C, 242-249

Abstract: As homoscedasticity assumption of asset return is questionable, traditional deposit insurance pricing analysis based on the Black-Scholes model always performs poorly. This paper focuses on deposit insurance pricing under a GARCH framework. A closed-form pricing formula is derived, and an estimation method for the pricing model with market data is also presented. We apply the pricing model on a sample of 40 U.S. exchange-listed banks and the results reaffirm the importance of GARCH framework. The premium rate under the GARCH framework is always much lower than its Black-Scholes counterpart during high-risk periods.

Keywords: Deposit insurance; GARCH; Option pricing; Capital forbearance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:26:y:2018:i:c:p:242-249

DOI: 10.1016/j.frl.2018.02.013

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