Risk-Neutralizing Statistical Distributions: With an Application to Pricing Reinsurance Contracts on Fdic Losses
37 Pages Posted: 3 Jun 2004
Date Written: May 25, 2004
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
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