Risk-Neutralizing Statistical Distributions: With an Application to Pricing Reinsurance Contracts on Fdic Losses

37 Pages Posted: 3 Jun 2004

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2004

Abstract

This paper proposes methods for obtaining risk neutral distributions when only the statistical density is observed. We employ renormalized exponential tilts and estimate the tilt coefficients from related options markets. Particular emphasis is placed on reinsurance losses for which we price in closed form using the Weibull extreme value distribution. The procedure is illustrated in detail for FDIC losses.

Keywords: Default Risk, Reinsurance, Bank Losses, Extreme Value Distributions, Risk Neutral Density

JEL Classification: G13, G21, G22, G28, G38

Suggested Citation

Madan, Dilip B. and Unal, Haluk, Risk-Neutralizing Statistical Distributions: With an Application to Pricing Reinsurance Contracts on Fdic Losses (May 25, 2004). Available at SSRN: https://ssrn.com/abstract=552181 or http://dx.doi.org/10.2139/ssrn.552181

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Haluk Unal (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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