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Deposit insurance pricing under GARCH

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  • Liu, Hailong
  • Li, Rui
  • Yuan, Jinjian

Abstract

As homoscedasticity assumption of asset return is questionable, traditional deposit insurance pricing analysis based on the Black-Scholes model always performs poorly. This paper focuses on deposit insurance pricing under a GARCH framework. A closed-form pricing formula is derived, and an estimation method for the pricing model with market data is also presented. We apply the pricing model on a sample of 40 U.S. exchange-listed banks and the results reaffirm the importance of GARCH framework. The premium rate under the GARCH framework is always much lower than its Black-Scholes counterpart during high-risk periods.

Suggested Citation

  • Liu, Hailong & Li, Rui & Yuan, Jinjian, 2018. "Deposit insurance pricing under GARCH," Finance Research Letters, Elsevier, vol. 26(C), pages 242-249.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:242-249
    DOI: 10.1016/j.frl.2018.02.013
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