Schools of Business Administration, University of California at Berkeley. The authors gratefully acknowledge the helpful suggestions of C. Jevons Lee, David Pyle, and Lemma Senbet, and the participants at finance seminars at the University of California, Berkeley, the Federal Reserve Bank of San Francisco, the University of Southern California, the Bank of Israel, Tel Aviv University, and two anonymous referees. The co-authors are responsible for any remaining errors. The original version of this paper was presented at the June 1985 meetings of the Western Finance Association.
Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model
Article first published online: 30 APR 2012
1986 The American Finance Association
The Journal of Finance
Volume 41, Issue 4, pages 871–896, September 1986
How to Cite
RONN, E. I. and VERMA, A. K. (1986), Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model. The Journal of Finance, 41: 871–896. doi: 10.1111/j.1540-6261.1986.tb04554.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships between equity and a call option, and insurance and a put option. The data utilizes the market value of equity to solve for the asset value and its volatility. Market perceptions of FDIC bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility. Sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification, thus facilitating allocation of aggregate premium across banks.