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

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: September 15, 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: risk measurement, deposit insurance

Suggested Citation

Madan, Dilip B. and Unal, Haluk, Risk-Neutralizing Statistical Distributions: With an Application to Pricing Reinsurance Contracts on Fdic Losses (September 15, 2004). FDIC Center For Financial Research Working Paper No. 2004-01, Available at SSRN: https://ssrn.com/abstract=681262 or http://dx.doi.org/10.2139/ssrn.681262

Dilip B. Madan (Contact Author)

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

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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