Risk-Neutralizing Statistical Distributions: With an Application to Pricing Reinsurance Contracts on Fdic Losses
FDIC Center For Financial Research Working Paper No. 2004-01
38 Pages Posted: 4 Apr 2005
Date Written: September 15, 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: risk measurement, deposit insurance
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